In: Economics
The first two columns give the maximum daily amounts of beer and whiskey that Southern Ireland and Northern Ireland can produce when they completely specialize in one or another product. The last two columns give each country's consumption without trade.
Maximum beer production | Maximum whiskey production | Beer consumption without trade | Whiskey consumption without trade | ||||||||
Northern Ireland | 500 | kegs | 1500 | bottles | 300 | kegs | 600 | bottles | |||
Southern Ireland | 1200 | kegs | 800 | bottles | 600 | kegs | 400 | bottles | |||
Suppose that Northern Ireland and Southern Ireland each have 1,000 hours of labor per day. Southern workers are paid €1 per day and Northern workers are paid £1 per day. What is the approximate exchange rate associated with an international price of one keg of beer = 1 bottle of whiskey?
Answer options:
€0.80 = £1
none of the options
€1 = £1
€1.14 = £1
Beer | Whiskey | |
---|---|---|
Nothern Ireland | 500 | 1500 |
Southern Ireland | 1200 | 800 |
Opportunity cost
Beer | Whiskey | |
---|---|---|
Northern Ireland | 3 bottles of Whiskey | 0.33 kegs of Beer |
Southern Ireland | 0.67 bottles of Whiskey | 1.5 kegs of Beer |
Beer | Whiskey | |
---|---|---|
Northern Ireland | 0 | 1500 |
Southern Ireland | 1200 | 0 |
Northern Ireland has comparative advantage in producing whiskey since its opportunity cost of producing whiskey is less than Southern Ireland. So, Northern Ireland will produce only whiskey.
Similarly southern Ireland will produce only Beer since it has lower opportunity cost.
Southern Ireland produce 1200 kegs of beer and pay €1 per day thus, they pay € 1000.
1200 kegs of beer = € 1000
Therefore, 1 keg of beer = € 0.8333
Similarly nothern Ireland produce 1500 bottles of Whiskey and pay £1 per hour that is £ 1000.
1500 bottles of whiskey = £ 1000
1 bottle of whiskey = £ 0.6666
Since they exchange 1 bottle of Whiskey with 1 keg of beer
Therefore, 1 keg of Beer = 1 bottle of whiskey
€ 0.8333 = £ 0.6666
£ 1 = € 1.25
None of the options.
Kindly contact before rating up I will be obliged to you for your generous support. Thank you