Question

In: Economics

The first two columns give the maximum daily amounts of beer and whiskey that Southern Ireland...

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

Solutions

Expert Solution

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
Production
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.

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