Question #126454
->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?
Expert's answer
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
