Business, 18.02.2020 19:49 arivalen

Suppose that Hungary and Spain both produce cheese and wine. Hungary's opportunity cost of producing a bottle of wine is 3 pounds of cheese. That is, Hungary forgoes the production of 3 pounds of cheese when it produces a bottle of wine. Spain's opportunity cost of producing a bottle of wine is 2 pounds of cheese.
(A. neither Italy or New Zealand, B. both Italy and New Zealand, C. Italy has, D. New Zealand has) a comparative advantage in the production of wine.
(A. neither Italy or New Zealand, B. both Italy and New Zealand, C. Italy has, D. New Zealand has) a comparative advantage in the production of cheese.

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Spain has a comparative advantage in the production of wine. Hungary has a comparative advantage in the production of cheese.

Explanation:

To compare the advantages of two countries to produce two goods, like Hungary and Spain both producing cheese and wine, you should use the comparative cost advantages.

The comparative cost advantage tells which country has a greater comparative advange than the other by comparing the ratio of the opportunity cost.

Hungary can produce 3 pounds of cheese when it produces a bottle of wine. Hence its opportunity cost ratio is:

3 lb of cheese / 1 bottle of wine, or1 bottle of wine / 3 lb of cheese = 0.33 bottle of wine / 1 lb of cheese.

Spain can produce 2 pounds of cheese when produce a bottle of wine. Hence its opportunity cost ratio is:

2 lb of cheese / 2 bottle of wine = 1 lb of cheese / 1 bottle of wine, or1 bottle of wine / 1 lb of cheese

Comparative advantage to produce wine:

To find which country has the comparative advantage in the prouction of wine compare: to Hungary, 1 bottle of wine costs 3 lb of cheese, while to Spain 1 bottle of wine costs 1 lb of cheese. Hence, since the opportunity cost of producing wine in terms of the production of cheese is lower for Spain, Spain has a comparative advantage in the production of wine.

Comparative advantage to produce cheese:

The opposite is true for the production of cheese. Since 3 lb of cheese cost 1 bottle of wine to Hungary, while 1 lb of cheese cost the 1 bottle, the opportunity cost of producing cheese in terms of the production of wine is lower for Hungary, Hungary has a comparative advantage in the production of cheese.

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