IGCSE Economics Paper-1: Specimen Questions with Answers 27 - 27 of 64

Question 27

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Through the following table it is shown that the maximum amounts of tea and coffee produced by US and China if they produce only one good

Through the following table it is shown that the maximum amounts of tea and coffee produced by US and China if they produce only one goodThrough the following table it is shown that the maximum amounts of tea and coffee produced by US and China if they produce only one good
CountryTeaCoffee
US8040
China2030

Assuming Marginal Cost as constant.

Choices

Choice (4)
a.Marginal cost of coffee production is 2 units of tea.
b.In China marginal cost of tea is 1 units of coffee.
c.US has a comparative advantage in production of coffee
d.All a. , b. and c. are correct

Answer

d.

Explanation

  • Consider the question where US has the absolute advantage of production of both tea and coffee. In the above table, US can produce 80 units of tea and 40 units of coffee while China can produce only 20 units of tea and 30 units of coffee.
  • A country is said to have a comparative advantage if it produces a good or service with the lowest opportunity cost.
  • US are opportunity cost of 1 unit of tea.
  • US can produce 80 tea or 40 coffee.
  • Therefore; 80 tea = 40 coffee
  • We need to make it 1 tea, so we divide both sides by 80.
  • 80 tea/80 = 1 tea
  • 40 coffee/80 = 0.25 coffee
  • Hence 1 tea = 0.25 coffee.
  • China’s opportunity cost of 1 unit of tea.
  • China can produce 20 tea or 30 coffee.
  • Therefore; 20 tea = 30 coffee
  • We need to make it 1 tea, so we divide both sides by 20.
  • 20 tea/20 = 1 tea
  • 30 coffee/20 = 1.5 coffee
  • Hence 1 tea = 1.5 coffee.
  • Thus, we see all the statements are true.

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