Opportunity cost

CFA Level I
#1

I always struggle with solving opportunity cost problems in Econ.Can you please explain how to solve this problem:

The country of Hokah uses 30 units of labor to produce a unit of cheese and 35 units of labor to produce a unit of leather. The country of Ymer uses 25 units of labor to produce a unit of cheese and 20 units of labor to produce a unit of leather. Which of the following statements is most accurate?

A. Ymer’s oppotunity cost of unit of leather is 0.8 units of cheese.

B. Hokah’s oppotunity cost of one unit of cheese is 1.167 units of leather.

C. Ymer has an absolute and a comparative advantage in both cheese and leather.

Thanks!

#2

Let’s start with the easy one: answer C cannot be correct, no matter the numbers. Ymer cannot have a comparative advantage in both cheese and leather: if the opportunity cost for cheese is lower than that for Hokah, then the opportunity cost for leather must be higher; if the opportunity cost for leather is lower, then its opportunity cost for cheese must be higher.

Figuring out the opportunity cost is simple algebra. Ymer’s opportunity cost for one unit of leather is:

1 unit of leather × (20 units of labor / unit of leather) × (1 unit of cheese / 25 units of labor)

= 0.8 units of cheese

Hokah’s opportunity cost for one unit of cheese is:

1 unit of cheese × (30 units of labor / unit of cheese) × (1 unit of leather / 35 units of labor)

= 0.857 units of leather

#3

Thank you so much kind sir!

#4

My pleasure.

(Did I get it right? Was A the correct answer?)

#5

Yes! And more importantly, i understand why its the correct answer. I love algebra :slight_smile:

#6

Whew!

Good for you!

As should we all.

#7

Also, can i expect to see some more Level 1 concepts demystified on your website before the December exam? I check it everyday for updates!!

#8

Let me know what you’d like to see. The e-mail adress is there.

#9

Ok so for every question of opportunity cost you can draw a chart like this.

Cheese Leather

HOKAH 30 35

YMER 25 20

Here you can easily look for the opportunity cost of cheese or leather for HOKAH and YMER.

Here in this question the correct answer is A, Ymer has a opportunity cost of per unit of leather is .80( 20/25).

#10

the answer obviously is A,

#11

What is your website Mr Magican?

#12

Look under CFA Test Prep, tutoring services.