Answers
a) Absolute Advantage:
Absolute advantage is the ability of a country to produce a good or service at a lower per unit cost as compared to any other country that produces same good or service.
United States has an absolute advantage in the production of Oil and Food.
b) A country has a comparative advantage in producing that good if the opportunity cost of producing that good is lower in that country as compared to another country.
United States;
400 units of Oil = 400 units of Food
1 unit of Oil = 400/400 unit = 1 unit of Food
1 unit of Food = 400/400 = 1 unit of Oil
Opportunity cost of producing 1 unit of Oil is 1 unit of Food and 1 unit of Food is 1 unit of Oil.
Canada;
100 units of Oil = 300 units of Food
1 unit of Oil = 300/100 unit = 3 unit of Food
1 unit of Food = 100/300 = 0.33 unit of Oil
Opportunity cost of producing 1 unit of Oil is 3 unit of Food and 1 unit of Food is 0.33 unit of Oil.
United States has comparative advantage in the production of Oil while Canada has comparative advantage in the production of Food.
With Specialization; United States will only produce Oil and maximum production = 400 units
Canada will produce only Food and production = 300
c) Trade; 25 units of Oil = 50 units of Food
United States; Oil = 400 - 25 = 375 units And Food = 50 units
Canada; Oil = 25 units And Food = 300 - 50 = 250 units
Both countries are able to consume good which lies outside PPF because of trade. So, both countries are better off.
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