Country a Can Produce Product X, but It Can Also

question 68

Multiple Choice

Country A can produce product X, but it can also buy it at a cheap rate from Country B. Which of the following courses of action is suitable in this situation according to Adam Smith's theory of absolute advantage?

• A) Country A should import product X from country B and it should not attempt to produce it at home.
• B) Country A should partly import the product and produce it domestically.
• C) Country A should produce more of product X and should attempt to obtain an absolute advantage for the product.
• D) Country A should subsidize the production of product X to obtain an absolute advantage over country B.

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Definitions:

Direct Labor-Hours

The aggregate amount of time spent by staff members directly participating in the creation process.

Variable Overhead Rate

The rate at which variable overhead costs are allocated to each unit of production, based on an activity driver.

Fixed Manufacturing Overhead

Costs in the manufacturing process that remain constant regardless of the production volume, including equipment depreciation and building lease expenses.

Direct Labor-Hours

The total hours worked by employees who are directly involved in the production of goods or services.