Question

3. The following table shows the number of weeks of labor required to produce 1 unit of each good in each country:

Country	Beef	Petroleum
Denmark	6 weeks	5 weeks
Western Sahara	20 weeks	40 weeks

1. Which country has the absolute advantage in beef? Which in petroleum?
2. Which country has the comparative advantage in beef? Which in petroleum?
3. Suppose Denmark has 600 weeks of labor available. Construct a production possibilities frontier for Denmark.
4. Construct the Danish consumption possibilities frontier if the terms of trade are 1 beef = 0.75 petroleum.
5. Select a pre-trade consumption point on the PPF. Now find a point on the CPF that involves more of both goods. NOTE: I am looking for a specific point on the CPF, with numbers calculated.

Answer 1

a)Denamrk has absolute advantage in beef and petroleum. Because it can produce both the goods faster than Western Sahara (WS).

b) Denamrk has comparative adnatage in the prodction of petroleum (0.83 against 2 of WS).
Western Sahara has comarative advantage int he production of beef (0.5 against 1.2 of Denark)

c) If Denmark has 600 weeks of labor, it can produce 100 units of beef (600/ 6 = 100) and 120 units of petroleum (600/ 5 = 120)

The production possibilities frontier for Denmark will be:

  

d) Terms of trade 1 beer = 0.75 petroleum.

If Denamrk poduces only pertroleum, it will produce 120 units of it. If WS produces only beer, it will produce 30 units of it (assuming 600 weeks of labor are avialable in WS too).

If Denmark trades 60 units of petroleum, it will get 80 units of beef in return.

Denamrk's consumption possibility lies beyond its PPF, indicating that it gains from theis trade. If it were to produce beef at home, its consumption of beef would have been on the PPF itself. If Denmark continues to trade, it can consume 133.33 units of beef. (100/ 0.75)