2 4 6 8 10 12 14 16 1 2 3 4 5 6 7 8 9 coffee tea

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Acres of coffee Production Opp. Cost of Coffee per 1,000 pounds Coffee Tea 0 0 1 1 9 2 1.9 8 1.11 3 2.7 7 1.25 4 3.4 6 1.43 5 4 5 1.67 6 4.5 4 7 4.9 3 8 5.2 2 3.33 9 5.4 1 10 1 2 2.5 5
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Now consider two areas, A and B, that each can grow coffee and tea. 5)What is the opportunity cost for each area to produce tea? Coffee? Tea 2 0.5 6)Which area has a comparative advantage in producing tea? Why? 7)Suppose areas A and B decided to trade coffee and tea with one another. Between what exchange ratios of coffee for tea (how many units of coffee per unit of tea) would make both countries better off? Between what exchange ratios of tea for coffee (how many units of tea per unit of coffee) would make both countries better off? 8)Which of the following is correct about comparative advantage? 9)The bowed out shape of the production possibility frontier implies that as production of one good a.decreases, society must give up increasing amounts of another good. b.decreases, society must give up constant amounts of another good. c.increases, society must give up decreasing amounts of another good. d.increases, society must give up increasing amounts of another good. A Tea 2 0.5 B

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