Sept 2013 Q34

[e_sit]

Hi guys

For part (ii) of this question the exam solution states that "Country A will devote half of its available resources to producing socks and half to producing shoes. Therefore Country A will produce 10 socks and 10 shoes."

But since when does it say that the total resource for country A is 20 hours (assuming resources are in units of hours)?

Furthermore, isn't A already producing equal amounts of socks and shoes already from the beginning?

And for B, " Country B will devote 1/3 of its available resources to producing socks and 2/3 of their resources producing shoes. Therefore Country B will produce 6 socks and 6 shoes."

Why does B have to deote 1/3 of its available resources to socks? And why is there total of 18 hours resources?

Is there some underlying assumptions that I'm missing?

Thanks a bunch!!

 

[divyam sankharva]

Hiii e-sit,

Here in the first line of question they have mentioned that "the table below shows weekly production of either socks OR shoes in both country", so country A have resources to produce either 20 socks or 20shoes ,it cannot produce both. If it have to produce both it will have to compromise a bit of other . And since question asks for equal production of both it can produce both 10 units.
Hope this helps

 

[Whippet1]

The question says that in each week, A can produce either 20 shoes (if it devotes all its resources to producing shoes) or 20 socks (if it devotes all its resources to producing socks). Likewise B can produce 18 socks or 9 shoes if it devotes all its resources to producing either one good or the other. The question doesn't actually specify what each country will do.

So, for example, if B devoted half of its weekly resources to producing each good, it would produce 9 socks and 4.5 shoes.

In (i), A has the absolute advantage in both goods, as it can produce more of each from its available weekly resources.

A has the comparative advantage (CA) in shoes (as the opportunity cost (OC) of each extra shoe is just one sock), wheras for B it is 2 socks. Conversely, B has the CA in socks, as the OC of each sock is just 1/2 a shoe.

In part (ii), as it is equally efficient at producing both goods, to produce equal amounts of socks and shoes, A will need to devote 1/2 its resources to each good and so will produce 10 of each good. This answers (ii)(a).

B could produce 18 socks and 0 shoes, or 16 socks and 1 shoes, or 14 socks and 2 shoes, or 12 socks and 3 shoes or 10 socks and 4 shoes, or 8 socks and 5 shoes or 6 socks and 6 shoes and so on. So, 6 socks and 6 shoes is the answer to (ii)(b).

Total production in the two countries would then be 16 socks and 16 shoes, whereas if they specialise based on CA, A produces 20 shoes and B produces 18 socks, giving a net gain of 4 shoes and 2 socks!