📚 Learning Guide
Absolute and Comparative Advantage
medium

According to David Ricardo's theory of comparative advantage, which of the following scenarios best illustrates the concept of opportunity cost?

Master this concept with our detailed explanation and step-by-step learning approach

Learning Path
Learning Path

Question & Answer
1
Understand Question
2
Review Options
3
Learn Explanation
4
Explore Topic

Choose the Best Answer

A

Country A can produce either 10 units of wine or 5 units of cheese, while Country B can produce either 6 units of wine or 2 units of cheese. Country A has a comparative advantage in wine production.

B

Country A produces 10 units of cheese while Country B produces 8 units of cheese, showing that both countries have the same opportunity cost.

C

Country A shifts production from 5 units of wine to 4 units of cheese, resulting in a loss of 1 unit of wine, while Country B continues to produce only wine.

D

Country A and Country B both produce 10 units of wine and 10 units of cheese, indicating that they do not specialize in production.

Understanding the Answer

Let's break down why this is correct

Answer

David Ricardo's theory of comparative advantage explains how countries or individuals can benefit from trade by specializing in the production of goods they can produce most efficiently. Opportunity cost is the value of what you give up when choosing one option over another. For example, if Country A can produce either 10 tons of wheat or 5 tons of corn, and Country B can produce either 4 tons of wheat or 2 tons of corn, the opportunity cost for Country A to produce 1 ton of corn is 2 tons of wheat. This means that by choosing to produce corn, Country A is sacrificing the chance to produce more wheat, which shows how understanding opportunity cost helps make better economic decisions. Thus, the scenario that illustrates comparative advantage is one where each country focuses on what it can produce at a lower opportunity cost compared to the other.

Detailed Explanation

This example shows opportunity cost clearly. Other options are incorrect because This option suggests both countries have the same cost, which isn't true; This choice confuses production shifts with opportunity cost.

Key Concepts

Opportunity cost
David Ricardo’s theory
Topic

Absolute and Comparative Advantage

Difficulty

medium level question

Cognitive Level

understand

Ready to Master More Topics?

Join thousands of students using Seekh's interactive learning platform to excel in their studies with personalized practice and detailed explanations.