Question

PLEASE ANSWERS THE FOLLOWING QUESTIONS WITH EXPLANATION AND FORMULAS: WRITE DIRECTLY TO THE EDITOR...

China and France produce Bikes and Cars. Both goods are manufactured using only one production factor (LABOR). The following table shows the unit labor requirements for each product in each country.

	BIKE	CAR
CHINA	2 Hrs.	16 Hrs.
FRANCE	8 Hrs.	8 Hrs.

NOTE: CHINA HAS 10,000 WORKERS AND FRANCE HAS 5,000 WORKERS.

Note: Verify that the global relative price of Bike (Car) is between the opportunity costs of Bike (Car)).

QUESTIONS:

1)Find the wage level in each country

2)Find the cost per hour of each good in each country.

3)Using the cost per hour, explain the cost advantage of China and France.

Answer 1

No country has an absolute advantage .china has an comparative advantage in production of bike and France has an comparative advantage in production of car .let’s assume that after manufacturing bike and car is sold at $100 each since there is only one factor of production which is labour the entire return will go to labour in form of wage.

1)

In china

to produce 1 bike and 1 car(2 unit of product) total 16+2=18 hour is required and china has 10000 labour so in one hour if each labour works total labour hour =10000. so total production =(total labour hour /total hours)*2 (In formula 2 is multiplied because in 18 hour 1unit car and 1 unit bike total 2 unit is produced)required to produce a good so total production =(10000/18)*2=555.56*2=1111.11 unit of cars and bike produced each unit is assumed to be of 100 dollar so total revenue after sale =1111.11*100=$111111 so wage got by a single labour in a hour =total revenue/total labour employed

wages=111111/10000=$11.11

In France

to produce 1 bike and 1 car(2 unit of product) total 8+8=16 hour is required and France has 5000 labour so in one hour if each labour works total labour hour =5000. so total production =(total labour hour /total hours)*2 required to produce a good so total production =(5000/16)*2=555.56*2=625 unit of cars and bike produced each unit is assumed to be of 100 dollar so total revenue after sale =625*100=$62500. So wage got by a single labour in a hour =total revenue/total labour employed

Wages=62500/5000=$12.5

2) In China

Suppose each labour take 1$ to work for 1 hour

so to produce bike they will take 2hr which means cost of bike =$2 per unit (since labour is only factor of production only wage is calculated in cost )

to produce car in china 16hr is required which means cost of car=$16 per unit (since labour is only factor of production only wage is calculated in cost )

In France

Suppose each labour take 1$ to work for 1 hour

so to produce bike in France it will take 8hr which means cost of bike =$8 per unit(since labour is only factor of production only wage is calculated in cost )

to produce car in china 8hr is required which means cost of car=$8 per unit (since labour is only factor of production only wage is calculated in cost )

3) China has a cost advantage to produce bike it can produce bike in $2 whereas france produce bike in $8

France has a cost advantage to produce car it can produce car in $8 whereas china produce car in $16