If with one hour of labor time nation A can produce either 3X or 3Y while nation B can produce either 1X or 3Y (and labor is the only input):
A) Px/Py=1 in nation A
B) Px/Py=3 in nation B
C) Py/Px=1/3 in nation B
D) Px/Py=3 in nation A

Question

Quizplus · Accepted Answer

In nation A, the opportunity cost of producing X is 1Y (3Y/3X) and the opportunity cost of producing Y is 1X (3X/3Y). Thus, the slope of the production possibilities frontier (PPF) is -1.
In nation B, the opportunity cost of producing X is 3Y (3Y/1X) and the opportunity cost of producing Y is 1/3X (1X/3Y). Thus, the slope of the PPF is -3.
For nation A, Px/Py=3/1=3, meaning that 1 unit of Y costs 3 units of X.
For nation B, Px/Py=1/3, meaning that 1 unit of Y costs 1/3 units of X.
Since nation A has a lower opportunity cost of producing X (only 1Y) and a comparative advantage in X, while nation B has a lower opportunity cost of producing Y (only 1/3X) and a comparative advantage in Y, the best choice is for nation A to specialize in producing X and for nation B to specialize in producing Y. Thus, the answer is D, as it represents the comparative advantage of each nation.

If with One Hour of Labor Time Nation a Can