Combination Health Care All Other Goods

A 0 100

B 25 90

C 50 70

D 75 40

E 100 0

a. Calculate the marginal opportunity cost of each combination. When going from A to B the opportunity cost of each unit of Healthcare is 10/25. When going from B to C it is 20/25, from C to D it is 30/25, and from D to E it is 40/25. You can find this for any good by using the formula, Opportunity Cost = What You Lose/ What You Gain. b. What is the opportunity cost of combination C? This requires that you find the opportunity cost at a point, and not over an interval. There are various ways to do it, but the most common way is to find the opportunity cost between B and D and use that to approximate the opportunity cost at C. That is given by 50/50 = 1. This is so because in going from B to D you lose 50 units of other goods and gain 50 units of Healthcare. c. Suppose a second nation has the following data. Plot the PPC, and then determine which nation has the comparative advantage in which activity. Show whether the two nations can gain from specialization and trade.

The PPC is plotted in the attached sheet. The opportunity cost of each combination in the second country is as follows. The cost of Healthcare when going from A to B is 10/20, from B to C is 15/20, from C to D is 20/20, and from D to E is 5/20. Now 10/20 > 10/25, but for every other combination the second country has a comparative advantage in the other good. So the opportunity cost of Healthcare is higher in the second country when going from A to B but lower at every subsequent point. As you might know if one country has an advantage in one product then the other will automatically have that in the second product. Thus the second country has a comparative advantage in other goods when going from A to B and in Healthcare for all subsequent