Question

Suppose that the opportunity-cost ratio for fish and lumber is 1F ≡ 1L in Canada but 2F ≡ 1L in Iceland. Then ________ should specialize in producing fish while ________ should specialize in producing lumber.

1. Canada; Iceland

2. Iceland; Canada

Short answer

The correct option is: b) Iceland; Canada

Step-by-step solution

Step 1. Explanation 

A lower relative opportunity cost implies that a country has a comparative advantage in a good’s production, resulting in specialization.

The opportunity cost of fish in Canada and Iceland are calculated below:

$$\begin{gathered} Canada; \\ 1F=1L \\ F=\frac{1}{1}L \\ F=1Lumber \\ Iceland; \\ 2F=1L \\ F=\frac{1}{2}Lumber \end{gathered}$$

Iceland has a lower opportunity cost in the production of fish than Canada.

The opportunity cost of lumber in Canada and Iceland are calculated below:

$$\begin{gathered} Canada; \\ 1F=1L \\ L=\frac{1}{1}L \\ =1Fish \\ Iceland; \\ 2F=1L \\ L=\frac{2}{1}F \\ =2Fish \end{gathered}$$

Canada has a lower opportunity cost in the production of lumber than Iceland.