Suppose in one year Colombia can produce either 8 thousand pounds of coffee or 4 thousand pounds of cashews. Further suppose that transitioning resources from one industry to the other results in a constant transformation rate, and so Colombia can produce anywhere along the resulting linear frontier. Suppose that Brazil can produce either ten thousand pounds of coffee or ten thousand pounds of cashews, also along a linear PPF.

Which of the following is true?

a. Colombia has a comparative advantage in coffee.

b. Brazil has a comparative advantage in cashews.

c. Brazil has an absolute advantage in cashews.

d. All of the statements are true.

Option (D) is correct.

Explanation:

A country has a comparative advantage in producing a commodity if the opportunity cost of producing that commodity is lower than the other country.

A country has an absolute advantage in producing a commodity if it uses the fewer resources than the other country to produce the same quantity of goods.

Colombia can produce either 8,000 pounds of coffee or 4,000 pounds of cashews:

Opportunity cost of producing a pound of coffee = 4,000 : 8,000

= 0.5 pounds of cashews

Opportunity cost of producing a pound of cashews = 8,000 : 4,000

= 2 pounds of coffee

Brazil can produce either 10,000 pounds of coffee or 10,000 pounds of cashews:

Opportunity cost of producing a pound of coffee = 10,000 : 10,000

= 1 pound of cashews

Opportunity cost of producing a pound of cashews = 10,000 : 10,000

= 1 pound of coffee

Therefore,

Columbia has a comparative advantage in producing coffee and Brazil has a comparative advantage in producing cashews.

Brazil has an absolute advantage in producing both the commodities.