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# Absolute and Comparative Advantage

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1. (25 points) Assume Nebraska and Virginia each have 100 acres of farmland. The following table gives hypothetical figures for yield per acre in the two states:

Wheat 9 5
Cotton 7 2

A) (8 points)

• Who has the absolute advantage in the production of wheat?

• Who has the absolute advantage in the production of cotton?

• Who has the comparative advantage in the production of wheat?

• Who has the comparative advantage in the production of cotton?

B) (8 points) In this exercise, you will find actual points on the combined PPC of the two states. For each of the following values of one good, calculate the maximum amount of the other good that the two countries could produce working together.

Wheat Cotton
350
210
800
905

C) (9 points)

a) On the back of this page, draw the graph for the PPC of the two states combined. On the graph, put the quantity of wheat on the vertical axis, and the quantity of cotton on the horizontal axis. Be sure to label your graph carefully to receive full credit!

b) What is the marginal rate of transformation when the two states are producing 150 units of wheat?

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#### Solution Preview

Please see the attached file.

1. (25 points) Assume Nebraska and Virginia each have 100 acres of farmland. The following table gives hypothetical figures for yield per acre in the two states:

Wheat 9 5
Cotton 7 2

A) (8 points)

• Who has the absolute advantage in the production of wheat?

Virginia has the absolute advantage. It can produce more wheat per 100 acres.

• Who has the absolute advantage in ...

#### Solution Summary

Determination of the relative and absolute advantage in the production of two goods.

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