Module-4
Comparative advantage:
The Ability to Produce at
The Lowest Opportunity Cost
TEACHER’S GUIDE
P. 101Defined
P. 104Content standards
P. 104Materials
P. 105Procedure
P. 106Lesson outline
P. 111Closure
P. 111Assessment
P. 115Overheads
P. 1292Answer key
Visuals N
Visuals for overhead projector.
Copy to transparent paper for overhead.
P. 116NVisual-1: Absolute advantage
P. 117NVisual-2: Comparative advantage
P. 118NVisual-3: Comparative advantage
P. 119NVisual-4: Montana bananas
Lessons 2
Copy and handout to students.
P. 1222Lesson-I: Montana bananas
P. 1252Lesson-II: Lawn care
P. 1272Lesson assessment
Comparative Advantage
The ability to produce at
Module-4
Teacher
the lowest opportunity cost
DEFINED
R
ecall the definition of opportunity cost (see Module-2). Opportunity
cost is the value of the next best alternative given up. Opportunity
cost helps to determine who produces what. Comparative advantage
is the ability to produce at the lowest opportunity cost.
By producing where costs are lowest, we have more resources
available to put into the production of other goods and services. Why
are bananas not produced in Montana? Climate may be a factor, but
hot houses could be built to ensure suitable banana tree habitat.
There is a cost to building banana hot houses. The cost is not only
the dollar expense of building the houses but also the opportunity
cost, the value of the next best alternative foregone. Montana weather
is conducive to growing wheat, not bananas. And indeed, Montana
has a lower opportunity cost to grow wheat than bananas. Montana
has a comparative advantage in growing wheat, South America has a
comparative advantage in growing bananas.
Refer to Module-3 2Lesson-I, p 8: Vegetables for beef. Veggie lovin’
Val can produce 500 bushels of vegetables on her ten acre plot. Meat
eatin’ Max can produce only 250 bushels of vegetables on his land.
Because Val can produce more bushels of vegetables than Max, Val has
the absolute advantage producing vegetables. The absolute advantage
is the ability to produce more of a good than potential trading partners
given a specified set of resources. Max can produce 25 cows to Val’s
ten cows given the ten acre plots. It is then also true that Max has the
absolute advantage in producing cows.
Comparative advantage is the ability to produce at the lowest
opportunity cost. Recall, Val’s opportunity cost to produce vegetables
is 1/50th of a cow. That is, Val must give up 1/50th of a cow for each
bushel of vegetables she produces. Max, on the other hand, must give
up 1/10th of a cow for each bushel of vegetables produced. Comparing
the relative price, 1/50th of a cow to 1/10th of a cow, Max’s opportunity
cost to produce vegetables is higher. Val has a comparative advantage,
a lower opportunity cost in producing vegetables.
It is also true that Max has a comparative advantage in producing
cows. It costs Max ten bushels of vegetables to produce a cow while it
costs Val 50 bushels of vegetables to produce a cow. Max’s opportunity
cost of raising cows is lower than Val’s.
Let’s look at this from a less intuitive direction. Assume Val sells her
land to farmer Fae. Like Val, Fae can grow 500 bushels of vegetables
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The ability to produce at
the lowest opportunity cost
on her ten acre plot. But Fae is better at producing cattle. In fact, Fae
can raise as many as 35 cattle on her ten acre plot. The production
possibilities frontier for Fae follows.
Farmer Fae has an absolute advantage over Max in both vegetable
and cow production. Fae can produce more bushels of vegetables
than Max with the given set of resources. Fae can also produce more
cows than Max with the given set of resources. But Fae does not have
a comparative advantage in both vegetables and cows. Fae does have
a comparative advantage over Max for vegetables. It still costs Max
1/10th of a cow to produce one bushel of vegetables and it costs
Fae just over 1/14th of a cow. Fae has a lower opportunity cost of
producing vegetables, and hence a comparative advantage in vegetable
production. However, Max has a lower opportunity cost of producing
cows. It still costs him ten bushels of vegetables to produce one cow.
In contrast, Fae must give up just over 14 bushels of vegetables to
produce one cow. Hence, even though Fae has an absolute advantage
in producing cows (she can produce more with the given resources),
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Comparative Advantage
The ability to produce at
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the lowest opportunity cost
Max has the comparative advantage.
Each of these farmers can benefit by producing the good where he
or she has the comparative advantage and then trading with the other
farmer for the other good. As shown in the production possibilities
frontier for farmer Fae and Max.
Here is another way to think about comparative advantage. Imagine
you are a tutor that can earn $30 per hour when working with students.
To be a good tutor, you must also keep student records. You are a good
record keeper and can type and file ten records per hour but you do
not get paid for the time it takes you to keep the records. Because
you have enough students to fill all working hours, you are thinking
about hiring a record keeper. You have a candidate to fill the position
that can type and file five records per hour for an hourly wage of ten
dollars. You must decide whether to fill the position or continue to file
the records yourself.
Determining who has the comparative advantage will help you
make a wise choice. You can file records faster than the potential
candidate (ten per hour compared to the record keepers five). But the
potential record keeper has a lower opportunity cost for record keeping.
While it costs you $30 to file ten records (ten records in one hour with
an opportunity cost of $30 per hour), it costs only $20 for the record
keeper to file ten records (five records per hour at ten dollars per hour).
The record keeper has a comparative advantage in keeping records.
It benefits you to hire the record keeper. You can earn more tutoring
($30) and paying the record keeper $20 for ten records leaving a net
return of ten dollars more than if you did the records yourself.
Productivity is greatest when production is done by those with
the lowest opportunity costs. They have a comparative advantage in
producing that good. Wealth is created when we specialize in what
we are good at and trade for everything else. Specialization allows
individuals and communities to expand consumption possibilities by
producing what they are good at and trading for things that are more
costly for them to produce on their own.
CONCEPTS
1. Absolute advantage
2. Comparative advantage
3. Specialization
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the lowest opportunity cost
OBJECTIVES
1. Understand the concept of absolute advantage.
2. Identify who has the comparative advantage.
3. Understand the difference between absolute and comparative
advantage.
4. Realize that specialization can further enhance the benefits
from trade.
CONTENT STANDARDS
National Content Standards in Economics
1. (Standard-2) Effective decision making requires comparing the
additional costs of alternatives with the additional benefits.
2. (Standard-5) Voluntary exchange occurs only when all participating parties expect to gain.
3. (Standard 6) When individuals, regions, and nations specialize
in what they can produce at the lowest cost and then trade with
others, both production and consumption, increase.
Montana Social Studies Content (Standard-5)
1. (Benchmark-1) Identify and explain basic economic concepts.
2. (Benchmark-4) Describe how personal economic decisions affect
the lives of people.
3. (Benchmark-6) Explain and evaluate the effects of global economic
interdependence.
TIME REQUIRED
2-3 class periods
MATERIALS
Overhead projector
Transparency pen
Visuals for overhead projector: Copy to transparency.
NVisual-1: Absolute advantage
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Comparative Advantage
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the lowest opportunity cost
NVisual-2: Comparative advantage
NVisual-3: Comparative advantage
NVisual-4: Montana bananas
Lesson worksheets: Copy for each student.
2Lesson-I: Montana bananas
2Lesson-II: Lawn care
2Lesson assessment
PROCEDURE
1. Explain to students the idea of absolute advantage. Absolute
advantage occurs when one entity can produce more of a commodity
than another with a given set of inputs. Display NVisual-1: Absolute
advantage. Examining the production possibilities frontier for Val
and Max, have students determine who has the absolute advantage
to produce vegetables (Val) and who has the absolute advantage to
produce cows (Max).
2. Introduce the concept of comparative advantage; the ability
to produce at the lowest opportunity cost. Display NVisual-2:
Comparative advantage. Remind students that opportunity cost is
the value of the next best alternative given up. Explain to students
that by producing where costs are lowest, we have more resources
available to put into the production of other goods and services.
Individual wealth can be increased by specializing where we have
a comparative advantage.
3. Discuss with students the concept of income. Income is the inflow
of receipts in a given time. By allowing for trade we can expand our
income. In the example of Val and Max, we can consume more goods
with trade, hence have increased our income. As a result, we have
also increased our wealth. We can do more of what we desire.
4. Recall in Module-3: Trade, that students were asked what they
would like to do for a career. With these future careers in mind,
discuss with students why it is important to specialize. Why
doesn’t everyone produce everything that they consume? By
specializing people become better at producing one thing than
others. Specializing enhances our comparative advantage. It makes
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The ability to produce at
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the lowest opportunity cost
us more productive. That is, we can produce more output per hour
(or per unit of input) than before.
5. Refer back to Module-3, 2Lesson-I: Vegetables for beef. Displaying
NVisual-3: Comparative advantage.
LQuestion: Who has a comparative advantage in vegetable
production?
Answer: Val.
LQuestion: Who has a comparative advantage in raising cows?
Answer: Max.
Lesson outline
Lesson-I: Montana bananas.
Materials:
NVisual-2: Comparative advantage
NVisual-4: Montana bananas
2Lesson-I: Montana bananas
PlaceNVisual-2: Comparative advantage on the overhead and
present a new question to the class;
LQuestion: Why are bananas not produced in Montana?
Answer: Climate may be a factor, but hot houses could be built to
ensure suitable banana tree habitat.
There is a cost to building banana hot houses. The cost is not only the
dollar expense of building the houses but also the opportunity cost,
the value of the next best alternative foregone. Montana weather is
conducive to growing wheat, not bananas. And indeed, Montana
has a lower opportunity cost to grow wheat than bananas. Montana
has a comparative advantage in growing wheat, South America has
a comparative advantage in growing bananas. Handout 2Lesson-I:
Montana bananas. Work through the production possibility frontier
with your students.
1. Explain the production possibility frontier for Montana as shown in
2Lesson-I: Montana bananas. Enough resources exist for Montana to
produce 100 units of wheat or two units of bananas. A combination
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The ability to produce at
the lowest opportunity cost
of wheat and bananas can be produced, giving up some wheat to
produce some bananas.
2. Explain that the production possibilities frontier (PPF) for Montana
shows this. You may wish to use NVisual-4: Montana bananas
showing the opportunity cost and production possibilities frontier
covering the bottom matrix. The production possibilities frontier
shows the maximum amount of wheat and bananas that Montana
can produce with a given set of resources. Because the line is linear,
Montana will always give up the same amount of wheat to increase
banana production by one unit (this assumption is not always true
in the real world).
The production possibilities given in the matrix show the
maximum production possible given current technology and
resources in a given period of time. The frontiers show the efficient
level of production if all resources are fully utilized. It is possible
to produce at any point below the frontier (between the origin and
the frontier) is possible to produce but inefficient. In this case all
resources are not being fully utilized or fully employed. Production
is not possible at any point beyond the frontier (Northeast of the
frontier). Consumption is possible beyond the frontier if trade
permits it.
3. Discuss with students that the amount of wheat given up to produce
bananas is the opportunity cost for Montana to produce bananas. This
follows the same logic as the example with vegetables and beef. It
can be seen on the graph that Montana can produce a combination
of the two goods, such as 50 units of wheat and one unit of bananas.
The opportunity cost is the amount of one good that must be given
up to produce the other. For Montana to produce one unit of bananas
it must give up 50 units of wheat. This answers question one of
2Lesson-I Worksheet: Montana bananas which asks:
LQuestion: What is the opportunity cost for Montana to produce
one unit of bananas? (This is also how much Montana would be
willing to pay for one unit of bananas).
Answer: The opportunity cost for Montana to produce one unit
of bananas is 50 units of wheat.
Notice, the opportunity cost is not given by the points on the
frontier—50 wheat for one unit of bananas or 75 wheat for one half
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The ability to produce at
the lowest opportunity cost
unit of bananas—rather it is the amount given up for one more unit,
as read along the axes. Montana gives up 100 minus 50, 50 units
of wheat, to produce the first unit of bananas or 100 minus 75, 25
units of wheat, to produce the first one half unit of bananas (which
is the same as 50 units of wheat for 1 unit of bananas).
4. Now look at the production possibilities for South America. South
America can produce 20 units of wheat or 100 units of bananas.
5. Have students work through the top paragraph of 2Lesson-I: Montana
bananas describing the opportunity cost for South America to produce
bananas. South America must give up 20 units of wheat to produce
100 units of bananas, which, because our production possibilities
are linear, means that South America must give up producing.2 units
of wheat to produce one unit of bananas (20÷100).
6. The producer with the lower opportunity cost in production has
the comparative advantage. We know that it costs Montana 50
units of wheat to produce one unit of bananas, and it costs South
America.2 units of wheat to produce one unit of bananas. Hence,
South America has the comparative advantage in producing bananas.
South America has the lowest opportunity cost to produce bananas
(.2 units of wheat versus 50 units of wheat). This answers question
2 of 2Lesson-I: Montana bananas.
7. Give students a few minutes to read through the remainder of
2Lesson-I: Montana bananas. See if the students can solve questions
3 and 4 on their own.
LQuestion: What is the opportunity cost for South America to produce
one unit of wheat?
Answer: Montana must give up two units of bananas to produce
100 units of wheat which is the same as.02 units of bananas for one
unit of wheat. The opportunity cost for Montana to produce one unit
of wheat is.02 units of bananas. South America must give up five
units of bananas to produce one unit of wheat (100÷20).
LQuestion: Who has the comparative advantage in producing
wheat?
Answer: The opportunity cost for South America to produce one
unit of wheat is five units of bananas.
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Comparative Advantage
The ability to produce at
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Teacher
the lowest opportunity cost
This answers question 3 and 4 in 2Lesson-I: Montana bananas.
Because Montana has the lower opportunity cost to produce wheat
(.02 units of bananas versus five units of bananas for South America)
Montana has the comparative advantage in producing wheat.
8. Discuss question 6 which asks:
LQuestion: How much is South America willing to pay for one
unit of wheat?
Answer: Five units of bananas, which is their opportunity cost
to produce the wheat.
9. LQuestion: Using wheat and bananas as currency, have students
think about how much each country would be willing to pay for the
products produced.
Answer: Each country is willing to pay as much as it costs them to
produce the product. What is Montana willing to pay for bananas?
It costs Montana 50 units of wheat to produce one unit of bananas.
Montana is willing to pay up to 50 units of wheat for one unit of
bananas.
This answers question 6 in 2Lesson-I: Montana bananas. It costs
South America.2 units of wheat to produce one unit of bananas.
South America is willing to accept anything over.2 units of wheat for
one unit of bananas. There is a lot of leeway for Montana and South
America to negotiate an acceptable trading price for bananas. Even
if transaction costs are high, which are not included in our model,
voluntary trade will likely occur.
10.LQuestion: What is the lowest price Montana will accept for one
unit of wheat?
Answer: It costs Montana.02 units of bananas to produce one
unit of wheat. Montana will accept anything over.02 units of
bananas in exchange for one unit of wheat.
Again there is potential for voluntary trade at a price between.02
and five units of bananas for one unit of wheat. This is summarized
in the matrix on the bottom of NVisual-3: Montana bananas.
11.Discuss questions 7 and 8 which asks:
LQuestion 7: Assume Montana and South America have decided
to specialize producing only where they have the comparative
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the lowest opportunity cost
advantage. They consume all that is produced and have negotiated
a price of one banana for ten wheat. If Montana consumes 50 units
of wheat and sells the rest, how much wheat and bananas will South
America consume?
LQuestion 8: Are there potential gains from trade?
Answer: If the price of one unit of bananas is set at ten units of wheat
(between what Montana is willing to pay and South America is willing
to accept), Montana can consume 50 units of wheat (100 produced
less 50 traded) and five units of bananas (five units of bananas bought
at ten wheat each equals the 50 wheat traded). Consumption will
be beyond the production possibilities frontier for Montana (this is
shown as point A on NVisual-4: Montana bananas). South America
will be able to consume 95 units of bananas (100 produced less five
sold) and the 50 units of wheat purchased (point B on NVisual-4:
Montana bananas, Figure 4.3: South America production possibilities
frontier). Clearly, both countries have gained from trade. This is true
for individuals, regions, and nations that specialize where they have a
comparative advantage and trade for other goods and services. Trade
can increase their consumption.
Lesson-II: Lawn care.
Materials:
2Lesson-II: Lawn care
Handout 2Lesson-II: Lawn care. Have students examine the
production possibilities frontier.
LQuestion: Who has the absolute advantage in mowing?
Answer: Lou
LQuestion: Who has the absolute advantage in trimming?
Answer: Lou
Have students raise their hand if they believe there are potential benefits
from trade. Have students work through the problem set in 2Lesson-II:
Lawn care or take it home for a homework assignment.
When the assignment is completed, discuss with the students
that working with each other allows each individual to specialize. By
specializing where we have the comparative advantage, each party is
better off. This is also true with trade. Instead of having a lawn business
you can imagine each party is producing a different good, wheat and
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The ability to produce at
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the lowest opportunity cost
barley, for example. Even though one party in this example is better at
growing both and has the absolute advantage in both, there are benefits
from trade.
Closure
Lesson Review
1. LQuestion: What is opportunity cost?
Answer: The value of the best alternative foregone.
2. LQuestion: What is the comparative advantage?
Answer: The ability to produce at the lowest opportunity cost.
3. LQuestion: Why do we trade?
Answer: There are mutual gains from trade. All parties voluntarily
entering into trade will benefit. Trade increases our consumption
possibilities, it increases wealth.
4. LQuestion: Should Montana grow bananas?
Answer: No. Montana does not have the comparative advantage
to grow bananas. Montana resources are better used to grow wheat
and other crops that have a lower opportunity cost relative to other
locations.
ASSESSMENT
Multiple-choice questions
1. LQuestion: A producer has the comparative advantage when:
a.Production costs are less than sales revenues.
b.They have the lowest opportunity cost for production.
c.Their opportunity cost is greater than the next best alternative.
d.They specialize through the use of an assembly line.
2. LQuestion: A producer with absolute advantage:
a.Will always have the comparative advantage.
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the lowest opportunity cost
b.Can produce more of a product than another entity with a
given set of resources.
c.Will never benefit from trade.
d.Will only benefit from trade with developed countries.
3. LQuestion: If Johnny and Carrie are producing wheat and cars,
Johnny has the comparative advantage in wheat when:
a. Johnny can produce more wheat than Carrie given the same set
of resources.
b. There are gains from trade between Johnny and Carrie.
c. Johnny gives up fewer units of cars to produce wheat than
Carrie does.
d. Johnny gives up more units of cars to produce wheat than
Carrie does.
4. LQuestion: When can a country consume at a point that sits outside
(northeast) of the production possibilities frontier?
a. When the country produces efficiently.
b. When the country uses the best available technology in
production.
c. A country can never consume beyond the production
possibilities frontier.
d. It is only possible with trade.
5. LQuestion: Assume France can produce 4 bicycles or 4 tons of
grapes and Germany can produce 2 bicycles or 4 tons of grapes.
Which country has the comparative advantage in producing
grapes?
a. France. France only gives up 1 bicycle for each ton of grapes.
b. Germany. Germany only gives up ½ a bicycle for each ton of
grapes.
c. France. France can produce more bicycles.
d. Neither country has the comparative advantage in grape
production.
Answers:
1.b.
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the lowest opportunity cost
2.b.
3.c.
4.d
5.b
Discussion/essay questions
1. LQuestion: Farmer Fae has the absolute advantage in producing
vegetables and cows over meat eatin’ Max. Because farmer Fae can
produce more of both goods with the give set of resources there is
no benefit to be gained if farmer Fae trades. True or false? Explain.
Answer: As discussed in the comparative advantage section above,
even though Fae has the absolute advantage in both goods, there
are gains to trade if she does not have the comparative advantage in
both goods. You may want to share this example with your students
to reemphasize that there are gains from trade even when one entity
(whether an individual, group, or country) can produce more of all
goods with the given set of resources.
2. LQuestion: Dick and Jane have just purchased some agricultural
land in Montana. Jane would like to grow pineapple because it is
her favorite fruit. Dick would rather grow wheat. Pretend you are
Dick and explain to Jane, in economic terms considering opportunity
cost and comparative advantage, why it would be more productive
to grow wheat.
Answer: Montana does not have a comparative advantage to grow
pineapple. Requiring a warm climate, pineapples could be grown in
hot houses in Montana. But one must consider what else could be
done with the resources used to construct hot houses and the land
used to grow pineapple. Montana’s climate is better suited to growing
wheat where hot houses are not necessary and the opportunity cost
is lower. In fact, the opportunity cost to grow wheat in Montana is
lower than other regions of the country. Montana has a comparative
advantage to grow wheat, not pineapple.
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O ve r h e a d
visuals
Comparative advantage
Comparative Advantage
Module-4
Visual
The ability to produce at
the lowest opportunity cost
Visual-1: Absolute advantage
absolute
advantage
The ability of one
entity to produce
more than another
with a given set
of inputs
116 N
Comparative Advantage
The ability to produce at
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Visual
the lowest opportunity cost
Visual-2: Comparative advantage
The Ability to Produce at The
Lowest Opportunity Cost
Is The Value of the Next Best
Alternative Given Up
N117
Comparative Advantage
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Visual
Visual-3: Comparative advantage
118 N
The ability to produce at
the lowest opportunity cost
Comparative Advantage
The ability to produce at
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Visual
the lowest opportunity cost
Visual-4: Montana bananas
Production possibilities frontier
montana
Production possibilities
frontier
South America
Production possibilities
frontier
.A
.B
opportunity cost
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Module-4
L e sso n
wor ksh e e ts
Comparative advantage
Comparative Advantage
The ability to produce at
Module-4
Lesson
the lowest opportunity cost
Lesson-I: Montana Bananas
Montana bananas
A
s shown in the production possibilities Montana can produce 100 units
of wheat or two units of bananas and South America can produce 20
units of wheat or 100 units of bananas. Below the production possibilities
Frontiers (PPF). The PPF shows the combination of wheat and bananas that
can be produced by Montana and South America.
Production can be any combination of wheat and bananas along (or inside)
the production possibilities frontier. Production along the frontier means
that all facilities are being used to capacity. If facilities are idle the point of
production will be inside the frontier. Production cannot take place beyond
the frontier unless there is a change in technology or resource availability.
Assume production is on the frontier.
Production possibilities frontier
122 2
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Comparative Advantage
The ability to produce at
Module-4
Lesson
the lowest opportunity cost
Lesson-i: Montana Bananas
Montana bananas
T
he opportunity cost to produce bananas is the quantity of wheat that
must be given up. South America must give up 20 units of wheat to
produce 100 units of bananas. Because the line is linear, we can also say
that it costs South America.2 units of wheat to produce one unit of bananas
(20÷100). Hence, the opportunity cost for South America to produce one
unit of bananas is.2 units of wheat. South America would be willing to trade
one unit of bananas in exchange for.2 units of wheat.
The opportunity cost to produce wheat is the quantity of bananas that must
be given up. The opportunity cost for Montana to produce one unit of wheat
is.02 units of bananas (2÷100). Montana would be willing to trade one unit
of wheat in exchange for.02 units of bananas.
The producer with the comparative advantage has the lowest opportunity
cost.
montana
Production possibilities frontier
South America
Production possibilities frontier
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Lesson
the lowest opportunity cost
Lesson-i: Montana Bananas
Questions:
1. LQuestion: What is the opportunity cost for Montana to produce one unit
of bananas? (This is also how much Montana would be willing to pay for
one unit of bananas).
2. LQuestion: Who has the comparative advantage in producing bananas?
3. LQuestion: What is the opportunity cost for South America to produce
one unit of wheat?
4. LQuestion: Who has the comparative advantage in producing wheat?
5. LQuestion: If both countries specialize and produce only where they have a
comparative advantage how much wheat and bananas will be produced?
6. LQuestion: How much is South America willing to pay for one unit of
wheat?
7. LQuestion: Assume Montana and South America have decided to specialize
producing only where they have the comparative advantage. They consume
all that is produced and have negotiated a price of one banana for ten wheat.
If Montana consumes 50 units of wheat and sells the rest, how much wheat
and bananas will South America consume?
8. LQuestion: Are there potential gains from trade? Explain, using your answer
to question seven.
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Comparative Advantage
The ability to produce at
Module-4
Lesson
the lowest opportunity cost
Lesson-ii: Lawn care
Lawn care
L
ou and Sid are both starting summer lawn care businesses. Lou is a very
good worker. Lou can mow one acre in one hour or trim one acre in two
hours. Sid is slower. It takes Sid four hours to mow a single acre. Sid is also
slower at trimming. It takes Sid three hours to trim one acre. The production
possibility shows the time it takes Lou and Sid to mow and trim.
Question:
The opportunity cost is what you forego to do something else. For example,
if Lou decides to mow one acre, Lou will give up trimming ½ an acre. If
Lou trims an acre, Lou will give up the ability to mow two acres. Fill in the
opportunity cost for Sid to mow and trim.
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2125
Comparative Advantage
The ability to produce at
Module-4
Lesson
the lowest opportunity cost
Lesson-ii: Lawn care
Lawn care
L
ou and Sid can each receive ten
dollars per acre that is mowed and
trimmed. If they do not work together,
it will take Lou three hours to mow and
trim one acre. Lou will earn $3.33 per
hour ($10÷3).
Alternatively, Lou and Sid can work
together and each specialize in their area
of comparative advantage. Assume they
equally split the ten dollars per acre.
Since it takes Lou one hour to mow Lou
will now earn five dollars per hour.
Questions:
1. LQuestion: Who has the comparative advantage (lowest opportunity cost)
to mow?
2. LQuestion: Who has the comparative advantage (lowest opportunity
cost) to trim?
3. LQuestion: How much will Sid earn per hour for mowing and trimming
one acre?
4. LQuestion: How much will Sid earn per hour when specializing?
5. LQuestion: Even though Lou is faster at both mowing and trimming, is Lou
better off working alone or trading skills with Sid? Is Sid better off working
alone?
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Comparative Advantage
The ability to produce at
Module-4
Lesson
the lowest opportunity cost
Lesson assessment
Multiple-choice questions
1. LQuestion: A producer has the comparative advantage when:
a.Production costs are less than sales revenues.
b.They have the lowest opportunity cost for production.
c.Their opportunity cost is greater than the next best alternative.
d.They specialize through the use of an assembly line.
2. LQuestion: A producer with absolute advantage:
a.Will always have the comparative advantage.
b.Can produce more of a product than another entity with a given set of
resources.
c.Will never benefit from trade.
d.Will only benefit from trade with developed countries.
3. LQuestion: If Johnny and Carrie are producing wheat and cars, Johnny has
the comparative advantage in wheat when:
a. Johnny can produce more wheat than Carrie given the same set of
resources.
b. There are gains from trade between Johnny and Carrie.
c. Johnny gives up fewer units of cars to produce wheat than Carrie does.
d. Johnny gives up more units of cars t produce wheat than Carrie does.
4. LQuestion: When can a country consume at a point that sits outside
(northeast) of the production possibilities frontier?
a. When the country produces efficiently.
b. When the country uses the best available technology in production.
c. A country can never consume beyond the production possibilities
frontier.
d. It is only possible with trade.
5. LQuestion: Assume France can produce 4 bicycles or 4 tons of grapes and
Germany can produce 2 bicycles or 4 tons of grapes. Which country has
the comparative advantage in producing grapes?
a. France. France only gives up 1 bicycle for each ton of grapes.
b. Germany. Germany only gives up ½ a bicycle for each ton of grapes.
c. France. France can produce more bicycles.
d. Neither country has the comparative advantage in grape production.
Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices
2127
Comparative Advantage
The ability to produce at
Module-4
Lesson
the lowest opportunity cost
Lesson assessment
Discussion/essay questions
1. LQuestion: Farmer Fae has the absolute advantage in producing vegetables
and cows over meat eatin’ Max. Because farmer Fae can produce more of
both goods with the give set of resources there is no benefit to be gained if
farmer Fae trades. True or false? Explain.
2. LQuestion: Dick and Jane have just purchased some agricultural land in
Montana. Jane would like to grow pineapple because it is her favorite fruit.
Dick would rather grow wheat. Pretend you are Dick and explain to Jane, in
economic terms considering opportunity cost and comparative advantage,
why it would be more productive to grow wheat.
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Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices
Comparative Advantage
The ability to produce at
Module 4
Answer
the lowest opportunity cost
Lesson-I: Answer Key
Montana bananas
1. LQuestion: What is the opportunity cost for Montana to produce one unit
of bananas? (This is also how much Montana would be willing to pay for
one unit of bananas).
Answer: 50 units of wheat. The producer with the comparative advantage
has the lowest opportunity cost.
2. LQuestion: Who has the comparative advantage in producing bananas?
Answer: In South America. The opportunity cost for one unit of bananas
is equal to.2 units of wheat, where in Montana one unit of bananas is costs
50 units of wheat.
3. LQuestion: What is the opportunity cost for South America to produce
one unit of wheat?
Answer: five units of bananas.
4. LQuestion: Who has the comparative advantage in producing wheat?
Answer: Montana. The opportunity cost for one unit of wheat in Montana
is equal to.02 units of bananas, where in South America one unit of wheat
costs.5 units of bananas.
5. LQuestion: If both countries specialize and produce only where they
have a comparative advantage, how much wheat and bananas will be
produced?
Answer: Montana will produce 100 units of wheat and South America
will produce 100 units of bananas.
6. LQuestion: How much is South America willing to pay for one unit of
wheat?
Answer: five units of bananas which is their opportunity cost to
Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices
2129
Comparative Advantage
The ability to produce at
Module 4
Answer
the lowest opportunity cost
Lesson-I: Answer Key
produce the wheat.
Montana bananas
7. LQuestion: Assume Montana and South America have decided to specialize
producing only where they have the comparative advantage. They consume
all that is produced and have negotiated a price of one banana for ten wheat.
If Montana consumes 50 units of wheat and sells the rest, how much wheat
and bananas will South America consume?
Answer: South America will consume 95 units of bananas (100 produced
less five traded) and 50 units of wheat.
8. LQuestion: Are there potential gains from trade? Explain, using your answer
to question seven.
Answer: Yes, both countries can consume beyond their production
possibilities frontier.
NOTES
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Comparative Advantage
The ability to produce at
Module 4
Answer
the lowest opportunity cost
Lesson-ii: Answer Key
Lawn care
L
ou and Sid are both starting summer Lawn care businesses. Lou is a very
good worker. Lou can mow one acre in one hour or trim one acre in two
hours. Sid is slower. It takes Sid four hours to mow a single acre. Sid is also
slower at trimming. It takes Sid three hours to trim one acre. The production
possibility below shows the time it takes Lou and Sid to mow and trim.
Question:
The opportunity cost is what you forego to do something else. For example,
if Lou decides to mow one acre, Lou will give up trimming ½ an acre. If
Lou trims an acre, Lou will give up the ability to mow two acres. Fill in the
opportunity cost for Sid to mow and trim.
Copyright © 2008 by MCEE (www.econedmontana.org) Economics: The Study of Choices
2131
Comparative Advantage
The ability to produce at
Module 4
Answer
the lowest opportunity cost
Lesson-ii: Answer Key
Lawn care
Lou and Sid can each receive ten dollars per acre that is mowed and
trimmed. If they do not work together, it will take Lou three hours to mow
and trim one acre. Lou will earn $3.33 per hour ($10÷3).
Alternatively, Lou and Sid can work together and each specialize in their
area of comparative advantage. Assume they equally split the $10 per acre.
Since it takes Lou one hour to mow Lou will now earn $5 per hour.
1. LQuestion: Who has the comparative advantage (lowest opportunity cost)
to mow?
Answer: Lou has the comparative advantage to mow. The opportunity
cost to mow for Fast Lou is equal to ½ acre in one hour. The opportunity
cost for Slow Sid is equal to 4/3 acre in one hour.
2. LQuestion: Who has the comparative advantage (lowest opportunity cost)
to trim?
Answer: Sid has the comparative advantage to trim. The opportunity cost
for Fast Lou is equal to two acre in one hour. The opportunity cost for Slow
Sid is equal to 3/4 acre in one hour. Slow Sid has the lowest opportunity
cost.
3. LQuestion: How much will Sid earn per hour for mowing and trimming
one acre?
Answer: Sid will earn $1.43 per hour to mow and trim an acre (ten dollars
per acre divided by seven hours worked)
4. LQuestion: How much will Sid earn per hour when specializing?
Answer: When Sid specializes by only trimming, Sid will earn $1.67 per
hour (five dollars per acre divided by three hours worked)
5. LQuestion: Even though Lou is faster at both mowing and trimming, is Lou
better off working alone or trading skills with Sid? Is Sid better off working
alone?
Answer: Both Lou and Sid can earn more by working together and
specializing in the area where each has a comparative advantage.
132 2
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