Question

Suppose that the opportunity-cost ratio for sugar and almonds is \(4 . S \equiv 1 A\) in Hawaii but \(1 S \equiv 2 A\) in California. Which state has the comparative advantage in producing almonds? LO38.2 a. Hawaii. b. California. c. Neither.

Short answer

b. California.

Step-by-step solution

Understanding Opportunity Cost

In Hawaii, producing 1 almond costs 4 units of sugar, expressed as \(4S \equiv 1A\). In California, producing 1 almond is equivalent to giving up 1/2 unit of sugar, expressed as \(1S \equiv 2A\), or equivalently \(1A \equiv \frac{1}{2}S\).

Comparing Costs for Almonds

To determine comparative advantage, compare the opportunity costs of producing almonds in Hawaii and California. In Hawaii, 1 almond costs 4 sugar units (4S). In California, 1 almond costs 1/2 sugar unit (because 2 almonds can be produced by giving up 1 sugar, i.e., \(1A \equiv \frac{1}{2}S\)).

Determining Comparative Advantage

The state with the lower opportunity cost for producing almonds has the comparative advantage. Comparing the two: Hawaii's cost (4S for 1A) is higher than California's cost (1/2S for 1A). Thus, California has the comparative advantage in producing almonds.

Key concepts

Opportunity Cost

Opportunity cost is the potential benefit that is forfeited when one option is chosen over another. In simpler terms, it's what you give up when you decide to do something. It quantifies the losses incurred in terms of the next best option. Consider the example of Hawaii and California in producing almonds and sugar. In Hawaii, producing 1 almond requires giving up 4 units of sugar. Meanwhile, in California, producing 1 almond only costs 1/2 unit of sugar. This difference illustrates how opportunity cost can influence decision-making since each state must decide based on what they sacrifice. Understanding opportunity cost is crucial to determining which region has a comparative advantage in production. By comparing what each state gives up, we can identify which one is doing it more efficiently—spending fewer resources or sacrificing less of an alternative good—which ties into understanding relative efficiencies.

Almond Production

Almond production involves determining where the resource allocation enables more efficient production, given opportunity costs. This concept is crucial in deciding which state has the comparative advantage. Let's take California, where 1 almond is exchanged for 1/2 unit of sugar, versus Hawaii, which exchanges 1 almond for 4 units of sugar. Because California gives up fewer sugar units to produce the same amount of almonds, it has a lower opportunity cost and thus a comparative advantage in almond production. This efficient use of resources allows states with a comparative advantage to specialize in producing goods where they are most efficient, enhancing overall production and economic benefits.

Sugar Production

The counterpart to almond production in this scenario is sugar production. Just as we determined a comparative advantage in almonds, we must also consider sugar production. For Hawaii, which needs 1 almond to produce 4 units of sugar, it might be more sensible to specialize in sugar production. The comparative advantage lies not in the absolute number of goods they can produce, but in where they minimize their opportunity costs. If producing sugar is relatively less costly in terms of almonds foregone than it is in California, Hawaii will have a comparative advantage in sugar production. Engaging in trade allows each state to specialize in what they do best. Hawaii can focus on sugar while California prioritizes almond production, enabling both to enjoy more of both goods through trade.