Answer-first summary for fast verification
Answer: Company B has a comparative advantage in NEITHER market
Company A is cheaper than Company B in both markets, so A has an **absolute advantage** in both markets. Now compare the size of A’s cost advantage: - USD market: 6.0% - 4.0% = **2.0%** - EUR market: 6.5% - 5.0% = **1.5%** A has the larger relative advantage in USD, so: - **Company A has the comparative advantage in USD borrowing** - **Company B has the comparative advantage in EUR borrowing** Therefore, statement **D** is false.
Author: Manit Arora
Ultimate access to all questions.
Question 1.6. Comparative advantage in borrowing markets
Consider two companies. Company A can borrow euros (EUR) at 5.0% or dollars (USD) at 4.0%. Riskier Company B can borrow EUR at 6.5% or USD at 6.0%. EACH of the following is TRUE except:
A
Company A has an absolute advantage in both markets
B
Company A has a comparative advantage borrowing dollars (USD)
C
Company B has a comparative advantage borrowing euros (EUR)
D
Company B has a comparative advantage in NEITHER market
No comments yet.