Tibet yak fat 0 2 4 6 8 peacock beaks 4 3 2 1 0 India yak fat 0 1 2 3 4 peacock

Question

Tibet

yak fat                               0          2          4          6          8

peacock beaks                   4          3          2          1          0

India

yak fat                               0          1          2          3          4

peacock beaks                   16        12        8          4          0

A) Find the opportunity cost of each good to each country.

B) Who has the comparative advantage for each good?

C) If both countries started in the middle, what are the gains to trade?

D) What is the range for the terms of trade for each good?

Explanation / Answer

Ans a - The opportunity cost of yak fat for Tibet is double than that of peacock beaks. And for India the opportunity cost for yak fat is four times than the peacock beaks.

Ans b - India has comparative advantage in peacock beaks and Tibet has comparative advantage in yak fats.

Ans c - India will have double yak fats to consume and Tibet will have four times peacock beaks to consume from trade.

Ans d - India & Tibet will trade 4 peacock beaks for 1 yak fat.

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