Answer to Question #88198 in Macroeconomics for BJ

Question

2. Comparative Advantage.
There are two countries, Absurdistan and Parador, that both produce wine and bread using one input, labor. The production costs for each in good in each country are as follows:
Labor Hours to Produce Absurdistan Parador
Bread (1 loaf) 2 1
Wine (1 bottle) 8 6
Relative price
(loaves per bottle)

a. In the table above, fill in the relative price of wine to bread, i.e. how many loaves of bread would need to be given up to produce a bottle of wine

Answer 1

Relative price of price of wine to bread in Absurdistan: ¼ or 0.25

Relative price of price of wine to bread in Parador: 1/6 or 0.1667

Explanation

A particular country is said to have comparative advantage if that country can produce a good or offer a service with lowest opportunity cost. Thus, in this case, to determine the relative price of wine to bread, we need to calculate the opportunity cost of 1 labour hour of producing 1 bottle of wine in both countries.

Absurdistan opportunity cost of 1 labour of producing wine

Absurdistan spends 8 labour hours to produce one bottle of wine and 2 labours hours to produce one loaf of bread.

 Thus, 8 labours to produce one bottle of wine = 2 labours hours to produce one loaf of bread.

To determine, the opportunity cost, we make it 1 hour labour by dividing it by 8 hours

2 hours/8= 1/4 labor hours

Therefore, the opportunity cost of 1 labor hour of producing one bottle of wine in Absurdstan is 1/4 labor hours of producing 1 loaf of bread.

Relative price is equal to the opportunity cost of production. This is because, the cost of a buying a good must be equal to the cost of producing a good, if a positive amount of the two goods are demanded in equilibrium.

Therefore, the relative price of wine to bread in Absurdistan is ¼ or 0.25.

Similarly, the opportunity cost of 1 labor hour of producing one bottle of wine in Parador is

1 hour/6= 1/6 labor hours.

Thus, the relative price of wine to bread in Parador is 1/6 or 0.1667.

Reference

https://www.atarsurvivalguide.com/calculating-comparative-advantage