Question

The Dominican Republic and Nicaragua both produce coffee and rum. The Dominican Republic can produce 18...

The Dominican Republic and Nicaragua both produce coffee and rum. The Dominican Republic can produce 18 thousand tons of coffee per year or 9 thousand barrels of rum. Nicaragua can produce 8 thousand tons of coffee per year or 2 thousand barrels of rum.

a. Suppose the Dominican Republic and Nicaragua sign a trade agreement in which each country would specialize in the production of either coffee or rum.

Which country should specialize in coffee?   (Click to select)   The Dominican Republic   Nicaragua  

Which country should specialize in rum?     (Click to select)   The Dominican Republic   Nicaragua  

Instructions: Enter your responses as decimal numbers rounded to three decimal places.

b. The minimum price at which these countries will trade coffee is  barrel of rum per ton of coffee and the maximum price is  barrel of rum per ton of coffee.

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Answer #1

The Dominican Republic can produce 18 thousand tons of coffee per year or 9 thousand barrels of rum. Nicaragua can produce 8 thousand tons of coffee per year or 2 thousand barrels of rum.

DR's opportunity cost of coffee = 9/18 = 0.5 rum and of rum = 18/9=2 coffee

Nicaragua Opportunity cost of coffee = 2/8 = 0.25 rum and of rum = 8/2 = 4 coffee

Which country should specialize in coffee? - Nicaragua  

Which country should specialize in rum? - Dominican Republic

The minimum price at which these countries will trade coffee is 2/8 = 0.25 barrel of rum per ton of coffee and the maximum price is 9/18 = 0.5 barrel of rum per ton of coffee.

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