Question

In: Economics

Country A and B each have 1000 units of labour. In-country A one unit of labour...

Country A and B each have 1000 units of labour. In-country A one unit of labour can produce 10 computers or 30 kg of cheese. Country B can use one unit of labour to produce 14 KG of cheese or 16 computers. Suppose country B follows its comparative advantage in deciding what to produce and trades with Country A at a trade price of 1.7 kg of cheese per computer and country B consumes 6400 computers at home, then country B gain from trade would be

______ kg of cheese

do not round your calculations untik you reach the final answer. Round two decimals.

Solutions

Expert Solution

Total Production of computer by country A = 10 *1000 computers = 10000 computers

Total Production of cheese by country A = 30 * 1000kg = 30000 kg of cheese

Opportunity cost of producing 10000 computers = 30000kg cheese

Opportunity cost of producing 1 computer = 3kg of cheese

Total Production of computer by country B = 14 *1000 computers = 14000 computers

Total Production of cheese by country B = 16 * 1000kg = 16000 kg of cheese

Opportunity cost of producing 14000 computers = 16000kg cheese

Opportunity cost of producing 1 computer = 1.14 kg of cheese

So B has comparative advantage in producing computers.

So B will produce a total of 14000 computers as it produces as per his comparative advantage.

Consumption of computer by B = 6400

So Computers available for Trading = 14000 - 6400 = 7600 computers

Trade against 1 computer = 1.7kg cheese

Trade against 7600 computers = 1.7 * 7600 kg of cheese = 12920kg of cheese

If B had produced Cheese instead of 7600 computers, it would have produced cheese = 1.14 * 7600 kg = 8664 kg of cheese.

So Gain of B from trade = 12920 - 8664kg = 4256kg of cheese.

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