Coffee Salmon Brazil 40 20 Alaska 20 20 Table 42 Coffee and

Coffee

Salmon

Brazil

40

20

Alaska

20

20

Table 4-2: Coffee and Salmon Production Possibilities II

5. (Table 4-2 Coffee and Salmon Production Possibilities II) This table shows the maximum amounts of coffee and salmon that Brazil and Alaska can produce if they just produce one good. Brazil has:

a. an absolute advantage in producing coffee only

b. an absolute advantage in producing salmon only

c. an absolute advantage in producing both coffee and salmon

d. an absolute advantage in producing neither coffee nor salmon

e. a comparative advantage in producing both coffee and salmon

Solution

From the table, Brazil can produce 40 units of coffee or 20 units of salmon. Hence the opportunity cost of producing unit of coffee is 20/40 = 0.5 units of salmon. The same for Alaska is 20/20 = 1 unit of salmon. Because the opportunity cost of producing 1 unit of coffee is lower in Brazil, Brazil has comparative advantage in coffee. It is also able to produce more coffee at 40 units than Alaska which is producing 20 units only. It also produces same units of salmon as Alaska produces. Hence it has absolute advantage in salmon also. So it has absolute advantage in both goods. Option C is therefore correct.