Comparative advantage between countries - Kaplan Study Text

This is a very odd example for Kaplan to have in their Study Text - nothing remotely similar has ever been asked in the Paper AFM (was P4) exam (and I cannot imagine ever would be asked!!) However have you typed out the whole question? I ask because there is no mention of either the costs or the selling prices of each product (both of which might be different in each country), and so I don't understand how you can say anything at all about the opportunity costs of each product.

Now that you have added the line "Each country has the same resources available to it and they are split equally between the two products", it makes a bit more sense. I will try and explain in a different way. Just suppose the limited resource was just materials, and both countries have 10,000 kgs of materials which they use 5,000 kgs for each of the two products. Country A is therefore using 5,000/1,200 = 4.16 kg per unit of X, and 5,000/720 = 6.94 kgs per unit of Y. Country B is using 5,000/960 = 5.21 kg per unit of X, and 5,000/240 = 20.83 kgs per unit of Y. Clearly country A is using the material more efficiently for both products, and both countries are using less material to make X than to make Y. However if you look at the differences, B is massively less efficient making Y than making X. (A is also less efficient making Y than making X but the difference is much, much less). It would therefore make more sense for B to switch to producing only X, and for A to switch to only producing Y. There will be an overall benefit. I hope that helps, but as I wrote before I really do think that putting this in the study text is rather ridiculous - it is nothing like anything that is likely ever to be asked in Paper AFM. I wouldn't spend too much time on it :-)

You are welcome :-)