a. Use the information above to compute the opportunity cost of producing 1 unit

Question

a. Use the information above to compute the opportunity cost of producing 1 unit of wheat in each country.

     For Great Britain, the opportunity cost of producing 1 unit of wheat is _4_ units of cloth.

For the United States, the opportunity cost of producing 1 unit of wheat is _0.5_ unit(s) of cloth.

b. Use the information above to compute the opportunity cost of producing 1 unit of cloth in each country.

For Great Britain, the opportunity cost of producing 1 unit of cloth is _0.25_unit(s) of wheat.

     For the United States, the opportunity cost of producing 1 unit of cloth is _2_ unit(s) of wheat.

i FILLED OUT THE FIRST HALF BECAUSE I KNOW HOW TO DO IT, BUT THIS IS WHERE I NEED HELP WITH THE MATH PARTS

c. With mutually beneficial trade, wheat will be exported by the US/GREATBRITAIN/BOTH/ OR NEITHER nation at a price higher than ____ unit(s) of cloth but lower than ____ unit(s) of cloth.

d. With mutually beneficial trade, cloth will be exported by the United States/Great Britain/both nations/OR neither nation at a price higher than ______ unit(s) of wheat but lower than _____ unit(s) of wheat.

e. Assume that internationally 1 unit of wheat can be traded for 0.8 unit of cloth, which is the same as 1C = 1.25W. Which of the following statements is correct?

Explanation / Answer

(a) Opportunity costs (OC):

In Great Britain, OC of wheat = 640 / 160 = 4 Cloth

In United States, OC of wheat = 640 / 1,280 = 0.5 Cloth

US can make wheat at a lower OC, so US has comparative advantage in wheat & will export wheat.

(b)

In Great Britain, OC of cloth = 160 / 640 = 0.25 wheat

In United States, OC of cloth = 1,280 / 640 = 2 wheat

Great Britain can make cloth at a lower OC, so Great Britain ahs comparative advantage in making cloth & will export cloth.

(c)

Trade is mutually beneficial if terms of trade (TOT) lies between the OC of the good in both countries.

Wheat will be exported by United State at a price higher than 0.5 Cloth but lower than 4 Cloth.

(d)

Cloth will be exported by Great Britain at a price higher than 0.25 wheat but lower than 2 wheat.

(e)

Both nations will benefit from trade, because the international trading price lies between the OC of both countries.

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