Question

Country A has 1400 labor units and can produce manufactures and food. A’s producers take 1 unit of labor to produce a unit of manufactures and 7 units of labor to produce a unit of food. Country B has 1500 units of labor and takes 3 units of labor to produce a unit of manufactures and 2 units to produce a unit of food. At what price in terms of manufactures would A and B respectively supply food? Would trade take place between A and B in Adam Smith’s world? How many manufactures could A supply?

Answer 1

In the given question, there are two countries A and B which produces manufactures and food using diifferent units of labour to produce the goods are as given below

country\good produced	Manufactures	Food
Country A	1	7
Country B	3	2

country A's opportunity cost of producing manufactures is 1/7 or o.14units of food

country B's opportunity cost of producing manufacures is manufactures is3/2 or1.5units of food

Now, the one with lower opportunity cost will produce the good with greater efficiency.

hence, country A will specialise in production of manufactures.

Similarly, country A's opportunity cost of producing food is 7units of manufactures

country B's opportunity cost of producing food is 2/3 or 0.67 units of manufactures

hence, country B will specialise in production of food.

Yes trade will take place according to Adam smith's world , the country will produce that good in which it has comparative advantage and as from above country A will export manufactures for food and country B will export food for manufactures.

country A will supply manufactures as amount of labor available times its opportunity cost of production .i.e. (1/7)*14000=2000units of labour is supplied.