Assume Nebraska and Virginia each have 100 acres of farmland. The following tabl

Question

Assume Nebraska and Virginia each have 100 acres of farmland. The following table gives hypothetical figures for yield per acre in the two states:

Nebraska Virginia
Wheat 5 2
Cotton 6 3

A)
• Who has the absolute advantage in the production of cotton?
• Who has the comparative advantage in the production of wheat?

B) In this exercise, you will find actual points on the combined PPC of the two states. For each of the following values of one good, calculate the maximum amount of the other good that the two countries could produce working together.


Wheat Cotton
200
240
600
550

C) In Virginia, what is the marginal rate of transformation between wheat and cotton? (Assume wheat is graphed on the vertical axis.)

Explanation / Answer

A) Nebraska has the Absolute Advantage in Cotton (6>3) Wheat costs Nebraska 6/5 cotton to make Wheat costs Virginia 3/2 cotton to make So, wheat is cheaper for Nebraska, therefore Nebraska has the Comparative Advantage in Wheat B) If we must make 200 Wheat, we should use Nebraska to make it since it has the comparative advantage in wheat. It takes 200/5=40 acres to grow that wheat leaving 60 acres to grow cotton, so Nebraska will grow 60*6=360 cotton. Virginia will only grow cotton, so it will grow 3*100=300 cotton. Together that will be 660 in cotton. So our first point is (200 wheat, 660 cotton). If we must make 240 Wheat, we should use Nebraska to make it since it has the comparative advantage in wheat. It takes 240/5=48 acres to grow that wheat leaving 52 acres to grow cotton, so Nebraska will grow 52*6=312 cotton. Virginia will only grow cotton, so it will grow 3*100=300 cotton. Together that will be 612 in cotton. So our second point is (240 wheat, 612 cotton). If we must make 600 in wheat, we will make as much in Nebraska as we can, which will be 5*100=500 wheat. Will still need to make 100 more, so it will take Virginia 100/2= 50 acres to do that. This leaves 50 acres for Virginia to make cotton, so it will make 50*3=150 cotton. So our third point is (600 wheat, 150 cotton) If we must make 550 in wheat, we will make as much in Nebraska as we can, which will be 5*100=500 wheat. Will still need to make 50 more, so it will take Virginia 50/2= 25 acres to do that. This leaves 75 acres for Virginia to make cotton, so it will make 75*3=225 cotton. So our final point is (600 wheat, 225 cotton) c) The marginal rate of transformation is the slope, so rise over run. MRS=2/3

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