Question

There are two countries, Lilliput and Blefuscu, which produce two goods: cilantro and hummus. In a single year, Lilliput can produce 4,000 tons of cilantro or 4,000 tons of hummus. In the same period of time, Blefescu can produce 500 tons of cilantro or 300 tons of hummus. Show your work as you answer these questions.

(a) Which country has absolute advantage in cilantro? (5%)
(b) Which country has absolute advantage in hummus? (5%)
(c) Which country has a comparative advantage in cilantro? (10%)
(d) Which country has a comparative advantage in hummus? (10%)
(e) Prior to trade, Lilliput makes 2,000 tons of cilantro, and Blefuscu makes 300 tons of cilantro. Draw these allocations on separate Production Possibilities Frontiers for each country. (10%)
(f) Considering the situation in (e), suppose that Lilliput gives Blefuscu 50 tons of hummus in exchange for 60 tons of coriander. Is this a beneficial trade for both countries? Use PPF diagrams to argue why or why not. (15%)
(g) Again considering the example in (e), what would be an example of a non-beneficial trade between the two countries? Show your work. (15%)

Answer 1

A) Lilliput has absolute advantage in cilantro because it can produce higher Quantity of cilantro than blefesco.

B) Lilliput has absolute advantage in hummus because it can produce higher Quantity of hummus than blefesco.

C) Opportunity cost of producing cilantro in Lilliput=4000/4000=1

Opportunity cost of producing cilantro in blefesco=300/500=0.6

So blefesco has lower opportunity of Producing cilantro ,so it has comparitive advantage in cilantro

D)

Opportunity cost of producing cilantro in hummus=4000/4000=1

Opportunity cost of producing cilantro in hummus=500/300=1.67

So Lilliput has lower opportunity of Producing hummus ,so it has comparitive advantage in hummus.