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opportunity cost

Answer the next question on the basis of the following production possibilities data for Landia and Scandia:

Landia production possibilities:
A B C D E
Fish 8 6 4 2 0
Chips 0 4 8 12 16

Scandia production possibilities:
A B C D E
Fish 48 36 24 12 0
Chips 0 12 24 36 48

Refer to the above data. What would be feasible terms of trade between Landia and Scandia?
Show any calculations

Solution Preview

The opportunity cost is defined to be the cost of the highest value alternative foregone. In the example above the only possibilities are fish and chips. So if you produce fish you give up some chips and vice versa. There are two points that need to be clarified before working on the solution:
1. Opportunity cost is defined to be the ratio of (What You Lose / What You Gain).
2. A party is said to have a comparative advantage in an activity if its opportunity cost of producing the good is lower than that of the other party. So, if A can produce good X at a lower opportunity cost than B, then A is said to have a comparative advantage in good X. Similarly, if B can produce good Y at a lower opportunity cost than ...

Solution Summary

The opportunity cost is illustrated in this tutorial.

$2.19