CFA Practice Question

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CFA Practice Question

Refer to the graph below. The graph demonstrates Saudi Arabia's and the United States' production possibility curves for widgets and wadgets. Given these production possibility curves, you would suggest that ______

A. Saudi Arabia specializes in widgets and the United States in wadgets.
B. Saudi Arabia specializes in wadgets and the United States in widgets.
C. both countries should produce an equal amount of each.
Correct Answer: A

The opportunity cost for Saudi Arabia of wadgets in terms of widgets is higher than the opportunity cost for the United States. Saudi Arabia has a comparative advantage in producing widgets and the U.S. has a comparative advantage in producing wadgets. Saudi Arabia should specialize in widgets and the United States should specialize in wadgets.

User Contributed Comments 7

User Comment
Bibhu Another way to look at this kind of graph problem. Just pick up which is under consideration and place it in y-axis.e.g. in the given graph widget in y-axis. So widget would be taken into consideration. Now slope is higher for soudi arabia, so as the advantages for Saudi for widget. Now subject area is wadgets. Just virtually rotate the graph so as wadgets in y-axis. Now look at the slope. US now bigger slope, so as the production possibilities for wadgets.
elbaker Saudi Arabia should stick to producing oil. The demand for oil is much greater than the demand for widgets.
mazen1967 the nation that has asteeper ppl has comparative advantage in producing the good on the vertical axis
papajeff Elbaker - leave reality out of it, this is econ, its supposed to be useless.
johntan1979 Lawrence of Arabia... who's with me? :)
gill15 Nov 11th was the HD of Lawrence of arabia in theaters and I missed it --- I was so sad....

now i`m sad again..
vatsal92 The nation that has a steeper PPC has comparative advantage in the good on Y-axis.
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