### CFA Practice Question

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### CFA Practice Question

Refer to the graph below. We can conclude from the diagram that ______

A. Islandia has a comparative advantage in both goods.
B. Ricardia has a comparative advantage in manufacturing and Islandia has a comparative advantage in agriculture.
C. Ricardia has a comparative advantage in agriculture and Islandia has a comparative advantage in manufacturing.

Since the opportunity cost of producing manufactured goods is lower in Ricardia, it has a comparative advantage in manufacturing. Since the opportunity cost of producing agricultural goods is lower in Islandia, it has a comparative advantage in agriculture.

User Comment
cbb1 The nation that has a steeper production possibilities line has comparative advantage in the good on the vertical axis. Since Ricardia has the steeper slope it has the advantage for manufacturing.
katybo I agree.
guna In Ricardia, 1 unit of Agricultural food is equal to 20 units of Manufactured goods, whereas in islandia, 1unit of agricultural foods is 12 units of manufactured goods. So more units of manufactured goods can be produced in Ricardia for every 1 unit of agricultural goods than islandia, hence ricardia has a comparative advantage in producing manufactured goods.
Shelton y_1 = -20 x_1 + 4000, y_2=-12 x_2+6000
x_1 = -1/20 y_1 + 200, x_2 = -1/12 y_2 + 500
20>12 => R for manu,
1/20<1/12 => I for agri.
vi2009 Agriculture:
Ricardia = 200 / 4000 = 1/20
Islandia = 500 / 4000 = 1/12
==> therefore ISLANDIA has comparative advantage

Manufacturing:
Ricardia = 4000 /200 = 20
Islandia = 4000/500=12
==> therefore RICARDIA has comparative advantage
2014 Thanks ccb1.
Shaan23 CCB and others. You cant really judge which is steeper or not by just looking at it. Use the numbers here. If on the vertical axis they were both at 4000 then do visually. But one graph at 6000 and other at 4000
chesschh We should understand the logic... simplyfing the numbers: Ricardia: 20 M for 1 A
Islandia: 12 M for 1 A
The logic is: Ricardia has to give up 20 M to produce 1 A while Islandia has to give up only 12 M to produce 1 A (this gives comparative advantage of agriculture to Islandia
On the other side... Ricardia has to give up 1 A to produce 20 M while Islandia has to give up 1 A to only produce 12 M (this gives comparative advantage of manufactures products to Ricardia)
kseeba17 Why do some people overcomplicate it?

Which one has the bigger difference in between the two production capabilities?

Islandia can produce 2.5x R in agriculture
Islandia can produce 1.5 x R in manufacturer

Clearly Islandia is more productive at producing Agriculture.

No need for long elaborate calculations its common sense.
maryprz14 4000/200 greater than 6000/500 ; Ricardia-Manu
500/6000 greater than 200/4000 ; Islandia-Agri
MathLoser Look at all these math experts