The countries of Alpha and Beta produce diamonds and pearls. The production poss

Question

The countries of Alpha and Beta
produce diamonds and pearls. The
production possibilities schedule below
describes their potential output in tons
per year:

a. What is the opportunity cost of diamonds
for each country?
b. What is the opportunity cost of pearls for
each country?
c. In which good does Alpha have a comparative advantage?
d. In which good does Beta have a comparative advantage?
e. Suppose Alpha is producing and consuming
at point B on its production possibilities
curve and Beta is producing and consuming
at point C on its production possibilities
curve. Use a table such as Exhibit 3 to
explain why both nations would benefit if
they specialized.
f. Draw a graph, and use it to explain how
Alpha and Beta benefit if they specialize and
Alpha agrees to trade 50 tons of diamonds
to Beta and Alpha receives 50 tons of pearls
in exchange.

Explanation / Answer

1) For Alpha, Opportunity cost of producing 2 diamonds is 1 pearl. Observe that for 50 units decrease in diamonds, there is a 25 unit increase in pearl.

For Beta, Opportunity cost of producing 1 diamond is 2 pearls. Observe that for 30 units decrease in diamonds, there is a 60 unit increase in pearl.

2) For Alpha, Opportunity cost of producing 1 pearl is 2 diamonds.

For Beta, Opportunity cost of producing 2 pearls is 1 diamond.

3) For Alpha, opportunity cost for pearl is more. Because instead of producing 1 pearl, it can produce 2 diamonds. So ALpha is having comparative advantage in producing diamonds.

4) For Beta, opportunity cost for diamond is more. Because instead of producing 1 diamond, it can produce 2 pearls.So Beta is having comparative advantage in producing pearls.

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