Question

1.    Costs are in hours/unit output. PLEASE SHOW ALL WORK/HOW YOU GOT YOUR ANSWERS.

Table 1	Honey	Tea
INDIA	1	1/3
WALES	1/6	1/4

a.    Find the opportunity cost of producing Honey and Tea.

        INDIA    Honey__________ Tea___________                               WALES Honey___________       Tea___________

b.     In which good does INDIA and WALES have a comparative advantage?

                                INDIA ____________________                                  WALES ____________________

c.    How many hours will INDIA and WALES gain if 6H are exchanged for 6T?

                                INDIA ____________________                  WALES ____________________

Answer 1

a) Opportunity cost of producing Honey in India = 1/(1/3) = 3

Opportunity cost of producing Tea in India = (1/3)/1= 1/3

Opportunity cost of producing Honey in Wales =(1/6)/ (1/4) = 2/3

Opportunity cost of producing Tea in Wales =(1/4) /(1/6) = 3/2

b) Opportunity cost of producing Honey in India =3 > Opportunity cost of producing Honey in Wales= (2/3)

so Wales has comparative adv. in producing HONEY.

Opportunity cost of producing Tea in India = (1/3)/1= 1/3 < Opportunity cost of producing Tea in Wales =(1/4) /(1/6) = 3/2

IMPLIES INDIA has comparative adv. in producing TEA.

c) India produce 6H in 6 (how 6*1) hours and 6T in 2 hours (how 6* (1/3))

Wales produce 6H in 1 hr (how 6*(1/6)) and 6T in 1.5 hours (how 6* (1/4))

IF TEA EXCHANGE 6H FOR 6T THEN

INDIA GAINS= 6-2 =4 HRS

WALES GAINS = 1.5-1= 0.5 HRS