Assume Nebraska and Virginia each have 100 acres of farmland. The following tabl

Question

Assume Nebraska and Virginia each have 100 acres of farmland. The following table gives hypothetical figures for yield per acre in the two states:

Nebraska Virginia
Wheat 8 4
Cotton 6 2

A)

• Who has the absolute advantage in the production of cotton?
• Who has the comparative advantage in the production of wheat?

B) In this exercise, you will find actual points on the combined PPC of the two states. For each of the following values of one good, calculate the maximum amount of the other good that the two countries could produce working together.

C) In Virginia, what is the marginal rate of transformation between wheat and cotton? (Assume wheat is graphed on the vertical axis.)

Explanation / Answer

calculate the opportunity costs

opp cost Nebraska for producing wheat:
for 8 wheat I give up 6 cotton . Opp cost = 6/8 cotton kg per wheat kg = 0.75

Opp cost for Virginia for producing wheat:
for 4 wheat i give up 2 cotton. Opp cost per unit of wheat = 2/4= 0.5

Comparative advantage occurs where the opp cost is lowest, therefore, Virginia has comparative advantage in wheat and Nebraska has comparative advantage in cotton.

A double check if you will is that when both states are producing the good in which they have competitive advantage, the total number of goods produced is maximized.

You make 12 goods total when V makes wheat and N makes cotton vs the 11 made when the situation is reversed.

Note: use the lowest opportunity cost method to calculate the answer in tests and assignments, even though selecting the combo with the most goods produced is far easier because teachers will want you to use the opportunity cost method.

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