Question

aL in wine (bottles)	aL in cheese (kilos)
Vintland	15	10
Moonited Republic	10	4

Vintland has 30 million hours of labor. Moonited Republic has 20 million hours of labor.

QUESTIONS: (NOT SHUBHAM PLZ)

A. If the equilibrium free trade relative price of cheese is ½ bottle of wine per kilo of cheese, what is the quantity of cheese produced in Vintland?

B. If the equilibrium free trade relative price of cheese is ½ bottle of wine per kilo of cheese, what is the quantity of wine produced in Vintland?

C. If the equilibrium free trade relative price of cheese is ½ bottle of wine per kilo of cheese, what is the quantity of cheese produced in Moonited Republic?

D. If the equilibrium free trade relative price of cheese is ½ bottle of wine per kilo of cheese, what is the quantity of wine produced in Moonited Republic?

Answer 1

Vintland can produce 1/15 bottles of wine or 1/10 kilos of cheese in an hour so the opportunity cost of cheese is 1/15/1/10 = 0.67 bottles of wine. Moonited Republic can produce 1/10 bottles of wine or 1/4 kilos of cheese in an hour so the opportunity cost of cheese is 1/10/1/4= 0.4 bottles of wine. This implies that Vintland has a lower opportunity cost and a comparative advantage in production of wine while Moonited Republic has a comparative advantage in production of cheese

A) Relative price of 1 kilo of cheese is 0.5 bottles of wine. Vintland would agree to this price as it is less than its own opportunity cost of 0.67 bottles of wine. It would produce only wine and production of cheese is 0 kilos.

B) Total quantity of wine is 30 million hours / 15 = 2 million bottles

C) Relative price of 1 kilo of cheese is 0.5 bottles of wine. Moonited Republic would produce only cheese and production of cheese is 20 million hours / 4 = 5 million kilos

D) Total quantity of wine in Moonited Republic is 0 bottles