Question

1. Consider two countries: Victoria and Senza. Suppose that each country makes only two goods: lingerie and mathematics textbooks. In a single year, Victoria can use all of its resources to produce either 1,000 tons of lingerie or 2,000 tons of textbooks. In the same period, Senza can use its resources to produce either 500 tons of lingerie or 1,500 tons of textbooks. Use this information to respond to the following questions. In each case, explain your answer.

a) Which country has comparative advantage in textbooks? In lingerie? (15%)
b) Suppose that, prior to trade, Victoria makes 500 tons of lingerie and 1,000 tons of textbooks, while Senza makes 250 tons of lingerie and 750 tons of textbooks.
If they trade, and Senza gives Victoria 300 tons of textbooks in exchange for 125 tons of lingerie, then would this constitute an improvement (i.e. could each country consume beyond its Production Possibilities Frontier)?

Answer 1

OP=opportunity cost

A) Victoria op of producing lingerie=2000/1000=2

Victoria op of producing texbook=1000/2000=0.5

Senza op of producing lingerie=1500/500=3

Senza op of producing textbook=500/1500=1/3=0.33

Victoria op of producing lingerie(2)< senza op of producing lingerie(3),

So Victoria has comparitive advantage in lingerie

Victoria op of producing textbook(0.5)>senza op of producing texbook(0.33),

So senza has comparitive advantage in texbook

B) after trade Victoria have 1300 texbook and 375 lingerie.

Without trade with 1300 texbook how much lingerie it could produce=500-300*0.5=350

So Victoria has 25 more lingerie after trade than before,so trade would make better off Victoria

After trade senza have 450 texbook and 375 lingerie

Without trade senza could produce how much texbook with 375 lingerie=750-125*3=750-375=375

So after trade senza have 75 more texbook than without trade ,so senza also better off by trade