Answer to Question #126454 in Microeconomics for Mmm

Question

Oman and Germany both produce oil and cars. Each country has 200 hours of labor per month.


->In Oman,
• Producing 1 car requires 50 hours of labor.
• Producing 1 barrel of oil requires 10 hours of labor.
• Oman can produce 4 cars or 20 barrels of oil per month.

-> In Germany,
• Producing 1 car requires 10 hours of labor.
•Producing 1 barrel of oil requires 40 hours of labor.
• Germany can produce 20 cars or 5 barrels of oil per month.

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a) Which country has an absolute advantage in producing cars? Which country has an absolute advantage in producing oil?

b) For Oman opportunity cost of a car is 5 barrels of oil, while for Germany is 0.25 barrels of oil. Which country has a comparative advantage in producing cars? Why?

c) For Oman opportunity cost of a barrel of oil is 0.2 cars, while for Germany is 4 cars. Which country has a comparative advantage in producing oil? Why?

d) If these two countries were open to trade, which good should Germany export to Oman? Why?

Answer 1

a.   Germany has an absolute advantage in producing cars while Oman has an absolute advantage in production of oil.

Germany

1 car=10 hrs of labor

what of 200 hrs.

200hrs divide by 10hrs= 20 cars

Oman

1 car = 50 hrs of labor .What of 200 hrs

 50 hrs= 4 cars

b. Germany has a comparative advantage compared to Oman since it uses fewer resources to produce many cars.

Opportunity cost for Germany is 0.25 while Oman is 5.The ratio of Germany to Oman = 1:20.Therefore Germany has higher comparative advantage due to lower opportunity cost.

c. Oman has a comparative advantage compared to Germany since it has a lower opportunity cost of oil in the production of cars

 Opportunity cost of Oman is 0.2 while Germany is 4.This is equivalent to the ration of 1:20 respectively

d. Cars. Since the production cost is low obtaining a comparative advantage over Oman

Germany

1 car=10 hrs of labor what of 200 hrs.

200hrs divide by 10hrs= 20 cars

Oman

1 car = 50 hrs of labor .What of 200 hrs

200hrs divide by  50 hrs= 4 cars