Widgetland has 60 workers. Each worker can produce 10 widget(s) or 12 wadget(s).

Question

Widgetland has 60 workers. Each worker can produce 10 widget(s) or 12 wadget(s). Each resident in Widgetland currently consumes 8 widget(s) and 8 wadget(s). Wadgetland also has 60 workers. Each can produce 10 widget(s) or 8 wadget(s). Wadgetland’s residents consume 8 widget(s) and 7 wadget(s). Is there a basis for trade? If so, offer the countries a deal they can’t refuse

.a. Is there a basis for trade (yes or no )

b. To maximize consumption, Widgetland should produce --------- wadgets

c. To maximize consumption, Wadgetland should produce ---------- widgets

d. Widgetland needs ------- widgets and has ---------- wadgets to trade for them.

e. Wadgetland needs -------- wadgets and has ---------- widgets to trade for them.

Explanation / Answer

(a)

Widgetland:

Opportunity Cost (OC) of widgets = 12 / 10 = 1.2 wadgets

Opportunity Cost (OC) of wadgets = 10 / 12 = 0.83 widgets

Wadgetland:

Opportunity Cost (OC) of widgets = 8 / 10 = 0.8 wadgets

Opportunity Cost (OC) of wadgets = 10 / 8 = 1.25 widgets

So, Widgetland can produce wadgets at a lower OC than Wadgetland (1.20 < 1.25), so it has comparative advantage in wadgets, and will specialize in wadgets.

Wadgetland can produce widgets at a lower OC than Widgetland (0.8 < 1.2), so it has comparative advantage in widgets, and will specialize in widgets.

There is a basis for trade.

(b)

Widgetland should produce (60 x 12) = 720 wadgets.

(c)

Wadgetland should produce (60 x 10) = 600 widgets.

(d)

Widgetland needs (8 x 60) = 480 widgets and has [720 - (8 x 60)] = 240 wadgets to trade.

(e)

Wadgetland needs (7 x 60) = 420 wadgets and has [600 - (8 x 60) = 120 widgets to trade.

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