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Chapter 20: Q5. (page 430)

Suppose that the opportunity-cost ratio for fish and lumber is 1F 鈮� 1L in Canada but 2F 鈮� 1L in Iceland. Then ________ should specialize in producing fish while ________ should specialize in producing lumber.

  1. Canada; Iceland

  2. Iceland; Canada

Short Answer

Expert verified

The correct option is: b) Iceland; Canada

Step by step solution

01

Step 1. Explanation 

A lower relative opportunity cost implies that a country has a comparative advantage in a good鈥檚 production, resulting in specialization.

The opportunity cost of fish in Canada and Iceland are calculated below:

Canada;1F=1LF=11LF=1LumberIceland;2F=1LF=12Lumber

Iceland has a lower opportunity cost in the production of fish than Canada.

The opportunity cost of lumber in Canada and Iceland are calculated below:

Canada;1F=1LL=11L=1FishIceland;2F=1LL=21F=2Fish

Canada has a lower opportunity cost in the production of lumber than Iceland.

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Most popular questions from this chapter

Explain: 鈥淭he United States can make certain toys with greater productive efficiency than can China. Yet we import those toys from China.鈥� Relate your answer to the ideas of Adam Smith and David Ricardo.

Why is a quota more detrimental to an economy than a tariff that results in the same level of imports as the quota? What is the net outcome of either tariffs or quota for the world economy?

Quantitatively, how important is international trade to the United States relative to the importance of trade to other nations? What country is the United States鈥� most important trading partner, quantitatively? With what country does the United States have the largest trade deficit?
  1. We see quite a bit of international trade in the real world. And trade is driven by specialization. So why don鈥檛 we see full specialization鈥攆or instance, all cars in the world being made in South Korea, or all the mobile phones in the world being made in China? Choose the best answer from among the following choices.

  1. High tariffs.

  2. Extensive import quotas.

  3. Increasing opportunity costs.

  4. Increasing returns.

Suppose Big Country can produce 80 units of X by using all its resources to produce X or 60 units of Y by devoting all its resources to Y. Comparable figures for Small Nation are 60 units of X and 60 units of Y. Assuming constant costs, in which product should each nation specialize? Explain why. What are the limits of the terms of trade between these two countries?
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