Question

Canada and Bolivia can produce rice and soybeans.

Canada requires 40 workers to produce one ton of rice and 20 workers to produce one ton of soybeans. Canada has 1200 workers who can produce rice or soybeans.

Bolivia requires 30 workers to produce one ton of rice and 5 workers to produce one ton of soybeans. Bolivia has 600 workers who can produce rice or soybeans.

Let ? denote tons of rice and let ? denote tons of soybeans.

1. a. Draw the PPF of each country with ? on the horizontal axis and ? on the vertical axis. Label the axes, intercept values, and slope of the line.

1. b. Which country has an absolute advantage in rice? In soybeans?

1. c. Which country has a comparative advantage in rice? In soybeans?

1. d. If Canada and Bolivia trade, which country would export rice?

1. e. What is the range of the price of rice, in tons of soybeans per ton of rice, under which Canada and Bolivia would trade with each other?

For parts (f), (g), (h), and (i), assume Canada and Bolivia trade at the price of 4 tons of soybeans per ton of rice.

1. f. On each of your graphs from part (a), add the CPF.

1. g. If Canada consumes 24 tons of rice, how many tons of soybeans would it consume?

1. h. If Canada wants to produce the bundle it consumes in part (g), how many workers would it need?

1. i. Suppose Bolivia increases its productivity, so that it now requires 24 workers to produce one ton of rice and 4 workers to produce one ton of soybeans there. Canada and Bolivia still trade at the price of 4 tons of soybeans per ton of rice. How much rice and soybeans does Canada consume now?

Answer 1

Please check out the image for diagram :

Equation of PPF Curve:

For Canada: 40R+20S=1200 where R is the unit of rice and B is the tons unit of soyabeans.....eq1

when R is zero, the y intercept is the tons of soyabeans produced which is 1200/20 =600

when B is zero, the z intercept is the tons of soyabeans produced when all the labour is employed on Rice which is 1200/40 =30 tons of R.

The slope of PPF curve represents represents the opportunity cost of moving from one combination of goods to another. It tells the oppurtunity cost of taking away one unit of labour from good x , how much of good x will be produced less.

slope of ppf curve: for canada

1unit of Soyabean takes 20 units of labour = 1unit of Rice takes 40 units of labour

slope of ppf = change in s/ change in R

40 dR+ 20 dS= 0

40dr =-20dS

dS/dR = -(40/20) = -2 (slope of ppf canada) i.e to increase the one unit of Rice by taking away labour from soyabean, soyabean production has to reduce by 2 units.

Similarly , for Bolivia

For Canada: 30R+5S=600 where R is the unit of rice and B is the tons unit of soyabeans.....eq1

when R is zero, the y intercept is the tons of soyabeans produced which is 600/5 =120

when B is zero, the z intercept is the tons of soyabeans produced when all the labour is employed on Rice which is 600/30 =20 tons of R.

1unit of Soyabean takes 5 units of labour = 1unit of Rice takes 30 units of labour

slope of ppf = change in s/ change in R

30 dR+ 5 dS= 0

30dr =-5dS

dS/dR = -(30/5) = -6 (slope of ppf bolivia) i.e to increase the one unit of Rice by taking away labour from soyabean, soyabean production has to reduce by 6 units.

b). Absolute advantage is when a country can produce a good or service in greater quantity for the same cost, or the same quantity at lower cost, than other country.

Bolivia has absolute advantage in producing Rice as it only needs 30 workers for one tons while canda takes 40 workers . Bolivia has absolute advantage in producing soyabeans also because it can produce one ton with 5 workers while canada needs 20 workers.

c). For comparative advantage in rice:

Canada 40 * R= 20 S

R=20/40 S= 0.5S Canada has to give up 0.5 of S for 1 unit of Rice

Bolivia 30*R= 5S

R=5/30 S= 1/6S Bolivia has to give up 0.167 of S for 1 unit of rice. Bolivia has less oppturnity cost. Bolivia has comparative advanatge in producing Rice.

For comparative advantage in soyabean:

Canada 20 S= 40 R

S=40/20 R= 2 R

Bolivia 5S=30R

S=30/5R = 6 R

Canada has to sacrifice only 2 tons of Rice for one more ton of soyabean than Bolivia 6 tons of Rice. Canada has comparative advanatge in producing Soyabeans.

d). Bolivia will export the rice as it has comparative adavnatage over canada in producing rice.

e). If price of rice is more than 2S , then Bolivia will export and if price is less than 6S then canada will import.