Q. 19 Look at Exercise 20.2. Compute t... [FREE SOLUTION]

Chapter 20: Q. 19 (page 494)

Look at Exercise 20.2. Compute the opportunity costs of producing sweaters and wine in both France and Tunisia. Who has the lowest opportunity cost of producing sweaters and who has the lowest opportunity cost of producing wine? Explain what it means to have a lower opportunity cost.

Short Answer

Expert verified

The opportunity cost of producing sweaters is, $2$ and the opportunity cost of producing a bottle of wine is, $3$ in France.

The opportunity cost of producing sweaters is, $\frac{1}{2}$ and the opportunity cost of producing a bottle of wine is, $\frac{1}{3}$ in Tunisia.

Tunisia has the lowest opportunity cost of producing sweaters and producing wine.

The lower opportunity cost shows a higher comparative advantage for the country, Tunisia.

Step by step solution

Step 1. Meaning of opportunity cost.

The forgone benefit that would have been derived from an option not chosen is the opportunity cost.

Step 2. The opportunity cost of production in France.

The opportunity cost of producing sweaters is, $2$ and the opportunity cost of producing a bottle of wine is, $3$ .

Step 3. The opportunity cost of production in Tunisia.

The opportunity cost of producing sweaters is, $\frac{1}{2}$ and the opportunity cost of producing a bottle of wine is, $\frac{1}{3}$ .

Step 4. The country having lower opportunity cost.

Tunisia has the lowest opportunity cost of producing sweaters and producing wine.

Step 5. Lower opportunity cost is better.

The lower opportunity cost shows a higher comparative advantage for the country, Tunisia because the country specializes in the production of goods. Lower opportunity cost means that the country would have to sacrifice less if it chooses to produce that good.