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How to Calculate Opportunity Cost & Comparative Advantage

Suppose that Kiribati can produce 1000 tons of breadfruit or 500 tons of fish, and that Tuvalu can produce 750 tons of breadfruit or 1875 tons of fish.
a) What is the opportunity cost of 1 unit of fish in Kiribati? Show calculation.
b) What is the opportunity cost of 1 unit of fish in Tuvalu? Show calculation.
c) Which country has a comparative advantage for producing fish? Why?
d)Suppose trade takes place between Kiribati and Tuvalu. Which good will Kiribati import from Tuvalu? Why?

Solution Preview

a) OCfish = Qbreadfruit/Qfish = 1000/500 = 2 tons of breadfruit
b) OCfish = Qbreadfruit/Qfish = 750/1875 = 0.4 tons of ...

Solution Summary

A sample calculation of the opportunity costs that two countries face in producing two goods. How to determine which country has a comparative advantage in which good, and the trading relationship that will develop between the two countries.

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