Operating with all of its resources, Country A can produce an automobile in 2 hours and a computer in 1 hour. Country B can produce an automobile in 4 hours and a computer in 4 hours. Which statement best describes the situation of Countries A and B?

1. Country A has an absolute advantage in the production of both goods.
2. Country B has an absolute advantage in the production of both goods.
3. Country B has an absolute advantage in the production of automobiles.
4. Country A has a comparative advantage in the production of automobiles.
5. Country B has a comparative advantage in the production of computers.

The following table provides information about two countries producing two different kinds of goods. The table shows the amount of time it takes to produce one unit of the good (bushels for wheat, units for smart phones). Answer the following questions based on the information in the table.

1. Calculate the opportunity cost of producing wheat in Country A and Country B.
2. Calculate the opportunity cost of producing smart phones in Country A and Country B.
3. Which country has an absolute advantage in the production of wheat?
4. Which country has a comparative advantage in the production of wheat?
5. Suppose Country A is currently producing 100 bushels of wheat and 100 smart phones, and suppose Country B is currently producing 50 bushels of wheat and 25 smart phones. To benefit from trade, should Country A reduce home production and start to import wheat, or should it reduce home production of smart phones and start to import smart phones? Explain.

Which of the following is NOT a benefit of increased trade?

1. Increased competition
2. Specialization
3. Adoption of new technologies
4. Greater variety
5. Diseconomies of scale