Question

In Lurnee, it takes 10 resources to produce 1 ton of cocoa and 13.5 resources to produce 1 ton of rice. In South Tyberg, it takes 40 resources to produce 1 ton of cocoa and 20 resources to produce 1 ton of rice. Lurnee has a comparative advantage over South Tyberg in cocoa. This follows the theory of comparative advantage, and we can say that engaging in free trade benefits all countries that participate in it; however, this conclusion stems from which of these inaccurate assumptions?

Answer 1

Answer:

We have assumed constant returns to scale

Explanation:

From the principle of comparative advantage which states that a nation should produce the goods where she has a lower opportunity cost than other nations.

From the question, it is inaccurate to assume a constant return to scale i.e an increase in inputs such as labor and capital as a factor of production will to an exact amount of increase in output.