7 Chapter Section 18 Problem 203 Canadas Production Possibil

7

Chapter Section .18. Problem 203 Canada\'s Production Possibilities Frontier Mexico\'s Production Possibilities Refer to Figure 3-20. If Canada and Mexico switch from each country dividing its time equally between the production of Good X and Good Y to each country spending all of its time producing the good in which it has a comparative advantage, then total production of Good Y will increase by

Solution

Comparative Advantage:

Canada:

16 units of Good Y = 8 units of Good X

1 unit of Good Y = 0.5 unit of Good X

Therefore, opportunity cost of producing 1 unit of Good Y is 0.5 units of Good X.

Mexico:

10 units of Good Y = 20 units of Good X

1 unit of Good Y = 2 unit of Good X

Therefore, opportunity cost of producing 1 unit of Good Y is 2 units of Good X.

Since, opportunity cost of producing 1 unit of Good Y is less in Canada. So, Canada has comparative advantage in the production of Good Y.

So, if Canada spends all its time on the production of Good Y then, total production of the economy will be 16 units.

While initially, Canada produces 8 units of Good Y and 4 units of Good X as they divide its time equally in the production of Good X and Y. Similarly, Mexico produces 5 units of Good Y and 10 units of Good X. So, total production of Good Y before comparative advantage = 8 + 5 = 13 units.

So, Total production of Good Y increases by 3 units ( 16 - 13).

Answer is D. 3 units.