ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -To calculate the opportunity cost for a product or service, you divide the production units, such as hours or quantity, for the product or service by the business’ production units for a different good or service. The result is the opportunity cost for producing the first product.

Detailed explanation-2: -The opportunity cost of one car in the US is the amount of grain that worker cannot produce. Since a US worker can produce either 4 cars or 10 tons of grain per year, if she produces 1 more car, she can’t produce 10/4 or 2.5 tons of grain.

Detailed explanation-3: -Mexico makes 20 tequila and 10 wine. In total, 100 wine and 40 tequila. Even though California has an absolute advantage in both goods, thanks to comparative advantage, both countries can have more of both goods when they specialize and trade. Therefore, California should produce wine and export it to Mexico.

Detailed explanation-4: -Comparative advantage describes a situation in which an individual, business or country can produce a good or service at a lower opportunity cost than another producer.