Suppose that country A and country B both produce wine and cheese. Country A has 800...

Suppose that country A and country B both produce wine and cheese. Country A has 800 units of available labor, while country B has 600 units. Prior to trade, country A consumes 40 pounds of cheese and 8 bottles of wine, and country B consumes 30 pounds of cheese and 10 bottles of wine.

Country A Country B

Labor per pound cheese 10 10

Labor per bottle wine 50 30

a. Which country has a comparative advantage in the production of each good? Explain.

b. Determine the production possibilities curve for each country, both graphically and algebraically. (Label the pretrade production point PT and the post-trade point P.)

c. Given that 36 pounds of cheese and 9 bottles of wine are traded, label the post-trade consumption point C.

d. Prove that both countries have gained from trade. e. What is the slope of the price line at which trade occurs?

Expert Solution

a. Country A has a comparative advantage in production of cheese and country B has comparative advantage in the production of wine. This is because, Country A requires 50 units of labour to produce a bottle of wine and 10 units for a pound of cheese, thus one bottle of wine creates an opportunity cost of 5 pounds of cheese and for country B producing one bottle of wine creates an opportunity cost of 3 pounds of cheese. Since B has lower opportunity cost of producing wine, hence it has comparative advantage in the production of wine and A has comparative advantage in the production of a pound of cheese.

b. A has 800 units of labour. It takes 10 units of labour to produce a pound of cheese and 50 units of labour to produce a bottle of wine. If all the labour produces wine, 800/50 = 16 bottles of wine are produced and if only cheese is produced, 800/10 = 80 pounds of cheese is produced. Hence, PPF equaltion is 50w + 10c =800 where, w is bottles of wine and c is the pound of cheese produced.

Using the same logic, PPF equation for country B is 30w + 10c = 600

Graph for b and c part is attached in the image:

d. Both the countries are made better off with the trade as eveident from the diagram. The initial consumption point moved from initial IC point tangent with PPF to an outer IC in the region outside PPF. Hence, both countries are made better off by moving to a higher IC due to trade.

e. Terms of trade would be 36:9=4:1, that is Price of cheese is 1/4 of the price of wine.

Rahul Sunny answered 8 months ago

Alice has income of $300, which she spends on cheese and red wine (both are divisible)....

Alice has income of $300, which she spends on cheese and red wine (both are divisible). The price of cheese is $5 per unit, and the price of red wine is $10 per glass. a. Draw Alice budget constraint with cheese is on the horizontal axis. (1 mark) b. Now assume that the shop has a special offer: if you buy more than 10 units of cheese, then the price is $2 each for any subsequent amount more than 10...

Suppose that Spain and Switzerland both produce beer and cheese. Spain's opportunity cost of producing a...

Suppose that Spain and Switzerland both produce beer and cheese. Spain's opportunity cost of producing a pound of cheese is 5 barrels of beer while Switzerland's opportunity cost of producing a pound of cheese is 10 barrels of beer. By comparing the opportunity cost of producing cheese in the two countries, you can tell that (Spain/Switzerland) has a comparative advantage in the production of cheese and (Spain/Switzerland) has a comparative advantage in the production of beer. Suppose that Spain and...

There are 2 countries, Home and Foreign, and 2 goods, Wine and Cheese. In each country...

There are 2 countries, Home and Foreign, and 2 goods, Wine and Cheese. In each country the are 150 workers. But not all workers are the same: some workers are cheese-makers and some workers are wine-makers. Each cheese-maker can produce one pound of cheese and zero bottles of wine, and each wine-maker can produce one bottle of wine and zero pounds of cheese. In the Home country there are 100 cheese-makers and 50 wine-makers, and in the Foreign country there...

The price of trade Suppose that France and Austria both produce beer and wine. France's opportunity...

The price of trade Suppose that France and Austria both produce beer and wine. France's opportunity cost of producing a bottle of wine is 4 barrels of beer while Austria's opportunity cost of producing a bottle of wine is 10 barrels of beer. By comparing the opportunity cost of producing wine in the two countries, you can tell that has a comparative advantage in the production of wine and has a comparative advantage in the production of beer. Suppose that...

Suppose that Spain and Denmark both produce beer and wine. Spain's opportunity cost of producing a...

Suppose that Spain and Denmark both produce beer and wine. Spain's opportunity cost of producing a bottle of wine is 3 barrels of beer while Denmark's opportunity cost of producing a bottle of wine is 11 barrels of beer. By comparing the opportunity cost of producing wine in the two countries, you can tell that (Spain,Denmark) has a comparative advantage in the production of wine and (Spain, Denmark) has a comparative advantage in the production of beer. Suppose that Spain...

Suppose that Spain and Denmark both produce oil and wine. Spain's opportunity cost of producing a...

Suppose that Spain and Denmark both produce oil and wine. Spain's opportunity cost of producing a bottle of wine is 4 barrels of oil while Denmark's opportunity cost of producing a bottle of wine is 11 barrels of oil. By comparing the opportunity cost of producing wine in the two countries, you can tell that [ ] has a comparative advantage in the production of wine and [ ] has a comparative advantage in the production of oil. Suppose that...

Suppose that France and Germany both produce wine and schnitzel. The table below shows combinations of...

Suppose that France and Germany both produce wine and schnitzel. The table below shows combinations of the goods that each country can produce in a day. France Germany Wine (Bottles) Schnitzel (Pounds) Wine (Bottles) Schnitzel (Pounds) 0 12 0 25 1 9 1 20 2 6 2 15 3 3 3 10 4 0 4 5 5 0 1. Who has the comparative advantage in producing wine and who has the comparative advantage in producing schnitzel? A. France has...

Roma and Parma are both capable of producing wine and cheese. With its resources Roma can...

Roma and Parma are both capable of producing wine and cheese. With its resources Roma can produce either 150 thousand pounds of cheese or 25 thousand bottles of wine. Parma with its resources can produce 80 thousand pounds of cheese or 10 thousand bottles of wine. Roma’s opportunity cost of producing one bottle of wine is equal to _ pounds of cheese. Parma’s opportunity cost of producing one bottle of wine is equal to _ pounds of cheese. Enter numbers...

Suppose country A has a GDP of $10 billion and country B has a GDP of...

Suppose country A has a GDP of $10 billion and country B has a GDP of $2 billion. If we assume that there are only two countries A and B in the world and that the coefficient of B can be approximated by the inverse of the world GDP, approximately what volume of trade is predicted to occur between the two countries if they are both 500 miles apart and our uncertainty parameter is given by 1.5. Suppose instead that...

France and England both produce wine and cloth with constant opportunity costs. France can produce 150...

France and England both produce wine and cloth with constant opportunity costs. France can produce 150 barrels of wine if it produces no cloth or 100 bolts of cloth if it produces no wine. England can produce 50 barrels of wine if it produces no cloth or 150 bolts of cloth if it produces no wine. When international trade takes place, each country specializes completely in the production of the good in which it has a comparative advantage: 1 barrel...

Question