Question

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Production Possibilities Table for Ireland Product A B C D Wine 120 90 60 0 Copper...

Production Possibilities Table for Ireland

Product A B C D

Wine 120 90 60 0

Copper 0 15 30 60

Production Possibilities Table for Peru

Product A B C D

Wine 500 350 150 0

Copper 0 30 70 100

Which country has an absolute advantage in Wine? In Copper?

What is the opportunity cost of producing 1 copper in Ireland?

What is it in Peru?

Which country has a comparative advantage in copper?

Which country has a comparative advantage in wine?

What are the terms of trade?

? < 1 copper < ?

Draw the new Consumption Possibilities Frontier (CPF) for these two countries (on the reverse side), assuming a world price of:

1 copper = 3 wine.

Solutions

Expert Solution

From the given table, Ireland can either produce 120 units of wine or 60 units of copper using all its resources.

Similarly, Peru can either produce 500 units of wine or 100 units of copper using all its resources.

a. Here, as Peru can produce more of both the goods, Peru has absolute advantage in the production of both the goods (wine and copper).

b. Opportunity cost of producing 1 copper in Ireland = units of wine sacrificed/units of copper produced = 120/60 = 2 wine

c. Opportunity cost of producing 1 copper in Peru = units of wine sacrificed/units of copper produced = 500/100 = 5 wine

d. As opportunity cost of producing copper is lower for Ireland, Ireland has comparative advantage in the production of copper.

e. Peru has comparative advantage in the production of wine.

f. Terms of trade lies in the range : 2 wine per copper < TOT < 5 wine per copper

or, 0.5 copper per wine > TOT > 0.2 copper per wine

g. If world price is 1 copper = 3 wine, we have shown CPF and PPF for both countries as follows:

Rahul Sunny answered 1 month ago

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