Question

Suppose there are only two countries in the world: France and Italy. Suppose further that there...

Suppose there are only two countries in the world: France and Italy. Suppose further that there are only two goods in the world, bicycles (B) and computers (C). Assume that the production possibilities frontier (PPF) for both countries is linear, and can be represented by the following equations: I

taly : 500 = 9C + 3B

France : 100 = C + B

(a) Draw each country’s PPF. What is the slope of each PPF if C is on the vertical axis? What does this slope measure?

(b) What is the opportunity cost of producing a unit of Bike in France? What is the opportunity cost of producing a unit of Bike in Italy?

(c) Which country has comparative advantage in Computers? In Bikes?

(d) Find the interval between which the relative price of Computers must fall for trade to be mutually beneficial.

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Homework Answers

Answer #1

a.

Slope measures the opportunity cost of bicycles in terms of computers.

Slope:

Italy= -55.5/166.6=-0.33

France= -100/100=-1

b.

For Italy, The opportunity cost of producing a unit of bike is 0.33 computers.

For France, The opportunity cost of producing a unit of bike is 1 computer.

c. Country which has lower opportunity cost of production will have comparative advantage in production of that good.

Italy has comparative advantage in production of Bicycles.

France has comparative advantage in production of computers.

d. Relative price of computers must fall betwen the opportunity cost of two countries.

0.33<Pc/Pb < 1

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