Chapter 8-10 HW - Universidad Iberoamericana UNIBE BBA in...

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Universidad Iberoamericana UNIBE BBA in International Business Microeconomics Professor Osvaldo Lagares Homework Chapter 8-10 Valerie Bodden Kluge (10-0014) Maria Gabriella Liriano (09-0881) October 27, 2010 Santo Domingo, Dominican Republic Chapter 8 Ex. 3.4, 3.5, 4.6, 4.14, 8A.8
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3.4 a. A country has an absolute advantage over another country when it can produce more of a good using the same resources. Chile has an absolute advantage in the production of both hats and beer because it can produce more of both goods (8 hats; 6 barrels of beer) than can Argentina (1 hat; 2 barrels of beer) with the same amount of labor input. b. A country has a comparative advantage when it can produce a good at a lower opportunity cost. To produce 8 hats, Chile must give up 6 barrels of beer. Therefore the opportunity cost to Chile of producing 1 hat is 6/8, or 0.75 barrels of beer. Argentina must give up 2 barrels of beer to produce 1 hat, so its opportunity cost of producing 1 hat is 2 barrels of beer. Chile has a comparative advantage in the production of hats because its opportunity cost is lower. To produce 6 barrels of beer, Chile must give up 8 hats, so its opportunity cost of producing 1 barrel of beer is 8/6, or 1.33 hats. Argentina must give up 1 hat to produce 2 barrels of beer, so its opportunity cost of producing 1 barrel of beer is 0.5 hats. Argentina has a comparative advantage in the production of beer because its opportunity cost is lower. c. As was shown in part b, Chile should specialize in producing hats, and Argentina should specialize in producing beer. By specializing, Chile can produce 8,000 hats (1,000 labor hours × 8 hats), and Argentina can produce 2,000 barrels of beer (1,000 labor hours × 2 barrels of beer). If Chile trades 700 hats to Argentina for 700 barrels of beer, the countries will end up with: Hats Beer Chile 7,300 700 Argentina 700 1,300 Both countries are better off than they were before specializing and engaging in trade. 3.5 The commentator is confusing absolute advantage and comparative advantage. Absolute advantage is the ability to produce more of a good or service than competitors when using the same amount of resources. Comparative advantage is the ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors. Every country, no matter how poor, will have a comparative advantage in producing some good. (Often countries are poor because they cannot or will not trade with others.)
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4.6 a. b.
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Chapter 8-10 HW - Universidad Iberoamericana UNIBE BBA in...

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