Question

1. Use the information in the table on labor productivities in France and Germany to answer questions a through f.

                            Output per Hour Worked

	France             Germany
Cheese	2 kilograms            1 kilogram
Cars	0.25                    0.5

1. Which country has an absolute advantage in cheese? In cars?
2. What is the relative price of cheese in France if it does not trade? In Germany?
3. What is opportunity cost of cheese in France? In Germany?
4. Which country has a comparative advantage in cheese? In cars? Explain your answer.
5. What are the upper and lower bounds for the trade price of cheese?
6. Draw a hypothetical PPC for France and label its slope. Suppose that France follows its comparative advantage in deciding where to produce on its PPC. Label its production point. If the trade price of cars is 5 kilograms of cheese per car, draw a trade line (CPC) showing how France can gain from trade.

Answer 1

a) France has absolute advantage in producing Cheese as it can produce 2Kg per hour against Germany's 1Kg and Germany has absolute advantage in producing Cars as it can produce 0.5 against France's 0.25

b) relative price of cheese in France=0.25/2=0.125 Car per kg cheese and in Germany is 0.5/1=0.5 Car per Kg cheese

c) Opportunity cost is same as the relative prices so for cheese in France opportunity cost=0.125 car per kg cheese and in Germany is 0.5 car per kg cheese

d) Since France has lower opportunity cost for cheese 0.125 car per kg against Germany's 0.5 car per kg, France will have compay advantage in producing Cheese while Germany will have in Car as it's opportunity cost for car is 2kg(1/0.5) cheese which is lower than 8kg(2/0.25) cheese for France.

e) For Trade to take place both countries must benefit from Trade hence upper end would be 0.5 car per kg cheese (Germany's opportunity cost for cheese) and lower bound will be 0.125 car per kg cheese( France's opportunity cost for cheese) so, (0.125,0.5) car per kg cheese