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Answer to Question #59631 in Microeconomics for ali
Question #59631
Comparative Advantage. Determine the terms of trade.
Andora: 1 shirt = 2 hrs. 1 bicycle = 40 hrs.
Bolivia: 1 shirt = 5 hrs. 1 bicycle = 60 hrs
Andora: 1 shirt = 2 hrs. 1 bicycle = 40 hrs.
Bolivia: 1 shirt = 5 hrs. 1 bicycle = 60 hrs
Expert's answer
Andora: 1 shirt = 2 hrs. 1 bicycle = 40 hrs.
Bolivia: 1 shirt = 5 hrs. 1 bicycle = 60 hrs
In this case Andora has comparative advantage in producing shirts, because it has lower opportunity costs (the opportunity cost of producing 1 shirt is 0.025 bicycle, when the same opportunity cost of Bolivia is 0.083 bicycle), so Andora will produce shirts and Bolivia will produce bicycles.
Bolivia: 1 shirt = 5 hrs. 1 bicycle = 60 hrs
In this case Andora has comparative advantage in producing shirts, because it has lower opportunity costs (the opportunity cost of producing 1 shirt is 0.025 bicycle, when the same opportunity cost of Bolivia is 0.083 bicycle), so Andora will produce shirts and Bolivia will produce bicycles.
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