Explain the difference between absolute advantage and comparative advantage. Calculate the opportunity cost of producing each product in each country.

You're on a roll — QUESTION 1 Explain the difference between absolute advantage and comparative advantage. Absolute advantage refers to a country's ability to produce a good using fewer inputs or more efficiently than another country. Comparative advantage, on the other hand, refers to a country's ability to produce a good at a lower opportunity cost than another country. QUESTION 2 The table below shows two countries producing both goods with the given resources. | | Papua New Guinea | Australia | | :---------------- | :--------------- | :-------- | | Wheat | 200 | 400 | | Rice | 400 | 800 | a. Calculate the opportunity cost of producing each product in each country. (Show your working out in the box) Step 1: Calculate the opportunity cost for Papua New Guinea. The opportunity cost of producing 1 unit of Wheat is the amount of Rice sacrificed. Opportunity cost of Wheat (PNG) = Rice producedWheat produced = 400 Rice200 Wheat = 2 Rice The opportunity cost of producing 1 unit of Rice is the amount of Wheat sacrificed. Opportunity cost of Rice (PNG) = Wheat producedRice produced = 200 Wheat400 Rice = 0.5 Wheat Step 2: Calculate the opportunity cost for Australia. The opportunity cost of producing 1 unit of Wheat is the amount of Rice sacrificed. Opportunity cost of Wheat (Australia) = Rice producedWheat produced = 800 Rice400 Wheat = 2 Rice The opportunity cost of producing 1 unit of Rice is the amount of Wheat sacrificed. Opportunity cost of Rice (Australia) = Wheat producedRice produced = 400 Wheat800 Rice = 0.5 Wheat Step 3: Fill in the table with the calculated opportunity costs. | | Papua New Guinea | Australia | | :---------------------- | :--------------- | :-------- | | Opportunity cost of wheat | 2 Rice | 2 Rice | | Opportunity cost of rice | 0.5 Wheat | 0.5 Wheat | b. If the two countries above decide to specialize in the production of a good they have comparative advantage in, which product would each of them produce? Step 1: Compare the opportunity costs for each good between the two countries. • For Wheat: Papua New Guinea's opportunity cost is 2 Rice. Australia's opportunity cost is 2 Rice. • For Rice: Papua New Guinea's opportunity cost is 0.5 Wheat. Australia's opportunity cost is 0.5 Wheat. Step 2: Determine specialization based on comparative advantage. Since the opportunity costs for producing both Wheat and Rice are identical for both Papua New Guinea and Australia, neither country has a comparative advantage over the other in either good. Therefore, based on these figures, there is no basis for specialization according to comparative advantage. Australia: No comparative advantage Papua New Guinea: No comparative advantage QUESTION 3 Explain the effect of tariff on prices and quantity of goods and services demanded and supplied. (Use the appropriate graph to help you explain and label the graph correctly) A tariff is a tax imposed on imported goods. When a tariff is imposed, it increases the cost of bringing foreign goods into the domestic market. Effect on Price: The price of imported goods in the domestic market will increase* by the amount of the tariff, or close to it. This also tends to raise the price of domestically produced goods that compete with the imports, as domestic producers can now charge more without being undercut by cheaper imports. Effect on Quantity Demanded: As the price of goods and services increases due to the tariff, the quantity demanded by consumers in the domestic market will decrease*, following the law of demand. Effect on Quantity Supplied: The higher domestic price incentivizes domestic producers to increase their production, leading to an increase in the quantity supplied by local firms. Conversely, the higher cost for importers leads to a decrease* in the quantity of imported goods supplied to the domestic market. Graphical Representation: Imagine a standard supply and demand graph with Price on the y-axis and Quantity on the x-axis. 1. Draw a downward-sloping Domestic Demand curve (D_D) and an upward-sloping Domestic Supply curve (S_D). 2. Initially, assume a World Price (P_W) that is below the domestic equilibrium price. This P_W line is horizontal, representing perfectly elastic supply from the world market. 3. At P_W, domestic consumers demand Q_D1 units, and domestic producers supply Q_S1 units. The difference, Q_D1 - Q_S1, represents the quantity of goods imported. 4. When a tariff (t) is imposed, the effective price for imports rises to P_W+t = P_W + t. Draw a new horizontal line at P_W+t above P_W. 5. At the new higher price P_W+t, domestic consumers demand a lower quantity, Q_D2. 6. At P_W+t, domestic producers are incentivized to supply a higher quantity, Q_S2. 7. The new quantity of imports will be Q_D2 - Q_S2, which is less than the original imports. In summary, the graph would show the price level rising from P_W to P_W+t, the total quantity consumed falling from Q_D1 to Q_D2, domestic production increasing from Q_S1 to Q_S2, and imports decreasing. Send me the next one 📸