# Chapter 26. Question 15

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Question 15
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You must read each slide, and complete any questions on the slide, in sequence.

The figure below shows the production possibilities frontiers (PPFs) for Italy and India for their domestic production of olives and tea. Without trade, assume that each is consuming olives and tea at point a.

### Question

A. India’s opportunity cost for one million tons of tea is DQLnPXXAd4jwoV5s million tons of olives, and India’s opportunity cost for one million tons of olives is U1syIiEJmco= million tons of tea. Italy’s opportunity cost for one million tons of tea is YXJxsMS5vlvwHgWV million tons of olives, and Italy’s opportunity cost for one million tons of olives is xL38JmWz7W0= million tons of tea. (Express all answers as a decimal rounded to 2 decimal places as needed.)
iH9380oQZBTM0h19q4kyyc3B1KY8po1aW1o2PJjFwXOPJvCJZhjis5t2L185jzYOMIEyIiY8KyK2amV+IKaYJJpMXzlcgpiu 9aToAmdRvLAy3FOx+foma3nWeWqFuZo9/HRzncEopD7iWMmXMBdR58ASJz6sM5mYlsU7o4BpNamuxNNxIPpoRc0XJSITPraEim0bbX6B+Yk=
Incorrect! Recall that opportunity cost is the amount given up to get one more. India’s opportunity cost for 1 million tons of tea is 4/60 = 1/15 ≈ .07 tons of olives, while India’s opportunity cost for 1 million tons of olives is 15 million tons of tea. (Notice that these numbers are just reciprocals of each other.) Italy’s opportunity cost for 1 million tons of tea is 12/20 = 3/5 = 0.6 tons of olives, while Italy’s opportunity cost for 1 million tons of olives is 1.6 million tons of tea. Since India’s opportunity cost for tea is lower, India will specialize in tea. Similarly, since Italy’s opportunity cost for olives is lower, Italy will specialize in olive production.
One country has a comparative advantage in producing some good if its opportunity cost to produce that good is lower than the other country’s. Countries should specialize in producing the good in which they have a comparative advantage. India’s opportunity cost for tea is lower, therefore India should specialize in tea production. Likewise, Italy’s opportunity cost for olives is lower and thus Italy should specialize in olive production.
Also note that in this case the two countries split the absolute advantages. In particular, Italy has the absolute advantage in olive production, while India has the absolute advantage in tea production. Therefore, the comparative advantages follow: Italy has the comparative advantage in olive production, while India has the comparative advantage in tea production.
Even if one country has the absolute advantage in the production of both products, as long as the opportunity costs are different, the countries can still specialize and gain from trade.
For further review, see section “Absolute and Comparative Advantage” (please link to section in the ebook).
Correct! Recall that opportunity cost is the amount given up to get one more. India’s opportunity cost for 1 million tons of tea is 4/60 = 1/15 ≈ .07 tons of olives, while India’s opportunity cost for 1 million tons of olives is 15 million tons of tea. (Notice that these numbers are just reciprocals of each other.) Italy’s opportunity cost for 1 million tons of tea is 12/20 = 3/5 = 0.6 tons of olives, while Italy’s opportunity cost for 1 million tons of olives is 1.6 million tons of tea. Since India’s opportunity cost for tea is lower, India will specialize in tea. Similarly, since Italy’s opportunity cost for olives is lower, Italy will specialize in olive production.
One country has a comparative advantage in producing some good if its opportunity cost to produce that good is lower than the other country’s. Countries should specialize in producing the good in which they have a comparative advantage. India’s opportunity cost for tea is lower, therefore India should specialize in tea production. Likewise, Italy’s opportunity cost for olives is lower and thus Italy should specialize in olive production.
Also note that in this case the two countries split the absolute advantages. In particular, Italy has the absolute advantage in olive production, while India has the absolute advantage in tea production. Therefore, the comparative advantages follow: Italy has the comparative advantage in olive production, while India has the comparative advantage in tea production.
Even if one country has the absolute advantage in the production of both products, as long as the opportunity costs are different, the countries can still specialize and gain from trade.
For further review, see section “Absolute and Comparative Advantage” (please link to section in the ebook).

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### Question

B. Assume that the two countries agree to specialize entirely in one product (the one in which each country has a comparative advantage), and agree to split the total output between them. Complete the table below. that follow.

 Country and Product Before Specialization (million tons) After Specialization (million tons) After Trade (million tons) Italy Olives 6 DDH6Tw1RFEk= yBhAQ+3VvjM= Tea 10 1Wh3cvJ2xF4= udX0h74V+w0= India Olives 2 1Wh3cvJ2xF4= yBhAQ+3VvjM= Tea 30 05dveybDphA= udX0h74V+w0=
Incorrect! If Italy specializes in producing olives, it can produce 12 million tons, which would be split evenly between the two countries. If India specializes in producing tea, it can produce 60 million tons, which would be split between the two countries.
Correct! If Italy specializes in producing olives, it can produce 12 million tons, which would be split evenly between the two countries. If India specializes in producing tea, it can produce 60 million tons, which would be split between the two countries.

### Question

dPib+i7hdVuUZd/SRdKvvbLPElRGbpzsWwyFDe4UbVT+kuRSFNdATXSbrlLRHOhomTcmBOJYlAgH2RiZjKnnJqDW+mMns4KAYGYOkZp1FuLDnhI4R52bj3gxuU1V/gJKbPKm6Ipome7QqqaSZlt2b12iTM3eSzxk8+iTbVk+5Rk/CAWyg/KJKrqgi8DYQ0Nldbr/h3wQQd/7nmF5kFebk5Pz8zyZOiOQI73rwn6SwTf4I7MG83nj15MUW9vZDC6ULSHXUHS9OrDYuHaje2WTL7zr4V1qOqqZQjGyxQxU5F3JPMAayDuQxWz8VLr72ynmjzjwIV314zLS12x/9PdVv/aec26oWY5pjaFca10UMkLWHrc70o+o95UlHwrxmYtLTmR0JK6X/GSKklvt99NEm//WmxnvcEvCe9lON2Ms6qXvOjXPZ9cXHpTZX77NxPijkxqp0od+lJBXgXN6
Incorrect! Originally, Italy consumed 6 million tons of olives and 10 million tons of tea, while India consumed 2 million tons of olives and 30 million tons of tea. After trade, each country consumes 6 million tons of olives and 30 million tons of tea. The new combination is outside each country’s PPF, so each country is better off with trade.
For further review, see section “Absolute and Comparative Advantage” (please link to section in the ebook).
Correct! Originally, Italy consumed 6 million tons of olives and 10 million tons of tea, while India consumed 2 million tons of olives and 30 million tons of tea. After trade, each country consumes 6 million tons of olives and 30 million tons of tea. The new combination is outside each country’s PPF, so each country is better off with trade.
For further review, see section “Absolute and Comparative Advantage” (please link to section in the ebook).