The law of comparative advantage says that:

A) the individual with the lowest opportunity cost of producing a particular good should produce it.
B) comparative advantage exists only when one person has an absolute advantage in the production of two goods.
C) whoever has a comparative advantage in producing a good also has an absolute advantage in producing that good.
D) whoever has an absolute advantage in producing a good also has a comparative advantage in producing that good.
E) gains from trade are possible only when one person has a comparative advantage in producing both goods.

Question

Scarlett Rodriguez · Accepted Answer

Final Answer : A, Explanation :  The law of comparative advantage states that the person who has the lowest opportunity cost of producing a particular good should specialize in producing it. This means that they give up less of another good in order to produce one unit of that good than anyone else. This leads to greater efficiency and increased gains from trade. Option B is incorrect because comparative advantage exists even when one person does not have an absolute advantage in the production of either good. Option C is incorrect because comparative advantage does not imply absolute advantage. Option D is incorrect because absolute advantage does not imply comparative advantage. And option E is incorrect because gains from trade are possible whenever both parties have different opportunity costs, regardless of whether one party has a comparative advantage in both goods.

Definitions

Learning Objectives

Learning Objectives

Related questions