Below is the production possibility information of small nations Arboc and Arbez

Question

Below is the production possibility information of small nations Arboc and Arbez, which can produce two goods, wheat, and coffee. The maximum quantity of each good is shown in the table below. Assume the two nations trade in a world containing many small nations. Costs are constant within each country.

ARBOC

ARBEZ

WHEAT

    COFFEE

WHEAT

COFFEE

120

0

120

0

0

30

0

20

1.      What is the opportunity cost of one unit of wheat in Arboc?

2.      What is the opportunity cost of one unit of wheat in Arbez?

3.      Which country has a comparative advantage in the production of wheat?

4.      What is the opportunity cost of one unit of coffee in Arboc?

5.      What is the opportunity cost of one unit of coffee in Arbez?

6.      Which country has a comparative advantage in the production of coffee?

7.      Based only on comparative advantage,

Arboc should produce which good?

Arbez should produce which good?

8.      The terms of trade are 2 units of wheat per unit of coffee,

Arboc should produce which good?

Arbez should produce which good?

9.      The terms of trade are 5 units of wheat per unit of coffee,

Arboc should produce which good?

Arbez should produce which good?

10. The terms of trade are 6 units of wheat per unit of coffee. Which country could not gain from trade?

ARBOC

ARBEZ

WHEAT

    COFFEE

WHEAT

COFFEE

120

0

120

0

0

30

0

20

Explanation / Answer

1.the opportunity cost of one unit of wheat in Arboc is 30/120=0.25 2.the opportunity cost of one unit of wheat in Arbez is 20/120=1/6 3.Arbez has a comparative advantage in wheat production, because of its lower opportunity cost of production with respect to arboc. 4.the opportunity cost of one unit of coffee in Arboc is 120/30=4 5.the opportunity cost of one unit of coffee in Arbez is 120/20=6 6.Arboc has a comparative advantage in wheat production, because of its lower opportunity cost of production with respect to arbez. 7.Arboc should produce wheat Arbez should produce coffea I have forgotten how to do from 8 down but i can tag a link!!! ;) http://en.wikipedia.org/wiki/Comparative_advantage(scroll down it describes the senario about trading :))

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