Question

1) In Canada, a worker who works 40 hours can produce 200 chairs or 100 tables. In Norway, a worker who works 40 hours can produce 240 chairs or 80 tables. Give one trade, in terms of chairs per table, at which the two countries would both be willing to trade.

2)In Canada, a worker who works 40 hours can produce 200 chairs or 100 tables. In Norway, a worker who works 40 hours can produce 240 chairs or 80 tables. Give one trade, in terms of tables per chair, at which the two countries would both be willing to trade.

3) In Canada, a worker who works 40 hours can produce 200 chairs or 100 tables. In Norway, a worker who works 40 hours can produce 240 chairs or 80 tables. Originally, each country divided its time equally between the production of tables and chairs. Now, each country spends all its time producing the good in which it has a comparative advantage. As a result, the total output of the two countries increased by how many tables?

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Answer 1

Production in 40 hours of labor

	Chairs	Tables
Canada	200	100
Norway	240	80

In Canada, a worker who works 40 hours can produce 200 chairs or 100 tables. In Norway, a worker who works 40 hours can produce 240 chairs or 80 tables.

	Opportunity cost of producing Chairs in terms of Tables	Opportunity cost of producing tables in terms of chairs
Canada	(100 / 200) = 0.5 tables	(200 / 100) = 2 chairs
Norway	(80 / 240) = 0.33 tables	(240 / 80) = 3 chairs

Norway's opportunity cost of producing chairs is lower than the Canada's opportunity cost of producing chairs. It means Norway has comparative advantage in the production of Chair. Hence, the Norway will export chair to Canada and import tables from Canada.

Canada's opportunity cost of producing tables is lpwer than the Norway's opportunity cost of producing tables. It means Canada has comparative advantage in the production of Tables. Hence, the Canada will export tables to Norway and import chair from Norway.

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(1) Canada has comparative advatage in table. Canada's opportunity cost of producing table is 2 chairs. It means the minimum price for a table in terms of chair will be 2 chairs. If price is less than this, then the it will be not beneficial for the Canada to trade.

Norway opportunity cost of producing table is 3 chairs. It means the maximum price for a table is terms of chair will be 3 chairs. If price is more than this, then it will be not beneficial for the Norways to trade.

Terms of trade of Table in terms of chair.

2 chairs < 1 table < 3 chairs.

So, any price in terms of chairs lies the terms of trade would be beneficial for both countries.

Like 2.5 chairs per table. (Answer)

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(2) Norway has comparative advantage in chairs. Norways opportunity cost of producing chair is 0.33 tables. It means the minimum price for a chair in terms of table will be 0.33 tables. If price is less than this, then it will be not beneficial for the Norway to trade.

Canada opportunity cost of producing table is 0.5 chairs. It means the maximum price for a chair in terms of table will be 0.5 tables. If price is more than this, then it will be not benefcial for Canada to trade.

Terms of trade of Chair in terms of table:

0.33 table < 1 chair < 0.5 table.

So, amy price in terms of tables lies in the terms of trade would be beneficial for both countries.

Like 0.4 tables per chair (Answer)

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(3) Production after devoting the time equally between the production of table and chairs.

	Chairs	Tables
Canada	100	50
Norway	120	40

In this case the total number of table produced is 90 (i.e., 50 + 40)

After specialization, each country will produce only that good in which they have comparative advantage with full resources.

Production after the specialization:

	Chairs	Tables
Canada	0	100
Norway	240	0

After specialization, Canada will produce 100 tables.

Hence, the total output of both countries for table increased by 10 tables (i.e., from 90 tables to 100 tables)