Suppose that in the United States a car can be produced with 200 labor hours, wh
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Suppose that in the United States a car can be produced with 200 labor hours, while a ton of rice requires 20 labor hours. In Japan, it takes 150 labor hours to make a car and 50 labor hours to grow a ton of rice. What is the opportunity cost of producing rice in each country, stated in terms of cars? What is the opportunity cost of cars, stated in terms of rice? Which country has a comparative advantage in cars? Which in rice?
Suppose that in the United States a car can be produced with 200 labor hours, while a ton of rice requires 20 labor hours. In Japan, it takes 150 labor hours to make a car and 50 labor hours to grow a ton of rice. What is the opportunity cost of producing rice in each country, stated in terms of cars? What is the opportunity cost of cars, stated in terms of rice? Which country has a comparative advantage in cars? Which in rice?Explanation / Answer
Assuming a car and a ton of rice are equivalent in value, the US must give up (opportunity cost) 10 tons of rice (200/20) to make one car, while the Japanese must give up 3 tons of rice (150/50) to make one car. Because the US must give up more rice than the Japanese to make one car (higher opportunity cost), the US has the comparative advantage in rice production, and should therefore specialize in it. The US must give up 1/10 of a car to make one ton of rice, while the Japanese must give up 1/3 of a car to make one ton of rice. Because the Japanese give up the opportunity to produce more cars (1/3) than the US (1/10) if they make rice instead, they have the comparative advantage in car production, and should therefore specialize in auto manufacturing.
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