Countries a and B Currently Consume 400 Units of Food

question 31

Multiple Choice

Countries A and B currently consume 400 units of food and 400 units of textiles each and currently do not trade with one another.The citizens of country A have to give up one unit of food to gain two units of textiles,while the citizens of country B have to give up one unit of textiles to gain two units of food.Their production possibilities curves are shown. Under the theory of comparative advantage

• A)The citizens of country A should make food and trade with the citizens of country B for textiles.
• B)The citizens of country A should make textiles and trade with the citizens of country B for food.
• C)There are no gains from trade in this example.
• D)A is twice as good as B at making food and B is twice as good as A at making textiles.

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Definitions:

Marginal Revenue

The additional income received from selling one more unit of a good or service, critical in determining optimal production levels.

Average Variable Cost

The total variable cost divided by the quantity of output produced, indicating the variable cost of producing each unit.

Total Fixed Cost

Total Fixed Cost is the sum of all costs required to produce a product or service that does not change with the volume of output, such as rent, salaries, and equipment maintenance.

Profit-Maximizing Output

The point of production where a company reaches its maximum profit occurs when the marginal revenue is equal to the marginal cost.