Widgetland has 60 workers. Each worker can produce 11 widget(s) or 5 wadget(s).

Question

Widgetland has 60 workers. Each worker can produce 11 widget(s) or 5 wadget(s). Each resident in Widgetland currently consumes 8 widget(s) and 3 wadget(s). Wadgetland also has 60 workers. Each can produce 4 widget(s) or 5 wadget(s). Wadgetland’s residents consume 2 widget(s) and 3 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:
(Click to select)
No
Yes
.

b. To maximize consumption, Widgetland should produce widgets.

c. To maximize consumption, Wadgetland should produce wadgets.

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

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

Explanation / Answer

For Widget land

Opportunity Cost of 1 widget=3/8 wadget=0.375 wadget

Opportunity Cost of 1 wadget=8/3 widget=2.67 widget

For Wadget land

Opportunity Cost of 1 widget=5/4 wadget=1.25 wadget

Opportunity Cost of 1 wadget=4/5 widget=0.8 widget

Opportunity cost of widget is less in widgetland and opportunity cost of wadget is less in wadgetland

a)

Yes there is basis of trade

Widgetland has comparative advantage in producing Widget and Wadgetland has comparative advantage in producing wadget.

So Widgetland can trade widget for wadget with wadgetland

Trade offer

Widget land can accept 0.375 or more wadget for 1 widget

Wadget land can offer 1.25 or less wadget for 1 widget

So any offer between 0.375 wadget to 1.25 wadget for 1 widget, no one will reject

b) yes to maximize consumption widgetland should produce widget

c) Yes to maximize xonsumption wadgetland should produce wadget

d)Yes, Widgetland needs wadgets and has widgets to trade for them.

e)Yes, Wadgetland needs widgets and has wadgets to trade for them.

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