Question

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Item 3

Item 3

The table below shows the production possibilities for Concordia and Harmonia.

Suppose that Richland and Prosperity have the output figures shown in the table below.

AVERAGE PRODUCT PER WORKER
	Wheat		Wine
Richland	3 bushels	or	1 barrels
Prosperity	1 bushels	or	2 barrels

Assume that cost and productivity remain constant. Round your answers below to 2 decimal places.

a. What is the opportunity cost of producing one bushel of wheat in Richland?

1 bushel of wheat =  barrels of wine.

b. What is the opportunity cost of producing one barrel of wine in Richland?

1 barrel of wine =   bushels of wheat.

c. What is the opportunity cost of producing one bushel of wheat in Prosperity?

1 bushel of wheat =  barrels of wine.

d. What is the opportunity cost of producing one barrel of wine in Prosperity?

1 barrel of wine =  bushels of wheat.

e. In which product does Richland have a comparative advantage?

Richland:  (Click to select)  Wheat  Wine

f. In which product does Prosperity have a comparative advantage?

Prosperity:  (Click to select)  Wheat  Wine

g. Fill in the missing production possibilities data for both countries in the table below. Assume that each country has a total of 10 million workers.

RICHLAND’S PRODUCTION POSSIBILITIES
(millions of units)
	A	B	C	D	E
Wheat	30	22.5	15	7.5	0
Wine
PROSPERITY’S PRODUCTION POSSIBILITIES
(millions of units)
	A	B	C	D	E
Wheat
Wine	0	5	10	15	20

Suppose that both countries are presently producing combination C.

h. Fill in the blanks in the table below.

TOTAL OUTPUT IN MILLIONS OF UNITS
	Wheat	Wine
Richland
Prosperity
Total: Both countries

Now suppose that each country specializes in the product in which it has a comparative advantage.

i. Show the results in the table below.

	Wheat	Wine
Richland
Prosperity
Total: Both countries

j. What is the joint gain from trade?

Wheat and  Wine

Suppose that the two countries establish the terms of trade at 1 wine = 2 wheat, and Richland decides to export 15 wheat to Prosperity.

k. In the table below show how the two countries will share the gain or loss from trade. Round your answers below to 1 decimal place.

GAINS FOR EACH COUNTRY IN MILLIONS OF UNITS
	Wheat	Wine
Richland
Prosperity

HARMONIA’S PRODUCTION
Product	A	B	C	D	E
Pork	8	6	4	2	0
Beans	0	8	16	24	32

a. What are the costs of the two products in each country? Round your answers below to 2 decimal places.

Concordia:

1 unit of pork costs  beans.
1 unit of beans costs  units of pork.

Harmonia:

1 unit of pork costs   beans.
1 unit of beans costs   units of pork.

b. Which products should each country specialize in and export?

Concordia:  (Click to select)  Pork  Beans
Harmonia:  (Click to select)  Pork  Beans

c. If, prior to specialization and trade, Concordia produced combination D and Harmonia produced combination B, what would be the total gains from trade?

Pork:
Beans:

d. What would be the range of feasible terms of trade between the two countries?

Feasible terms of trade
1 unit of pork	between  and  bean
1 bean	between  and  units of pork

Answer 1

AVERAGE PRODUCT PER WORKER

	Wheat	Wine
Richland	3 bushels	1 barrel
Prosperity	1 bushels	2 barrels

Opportunity cost of one product = amount of other good foregone to produce one unit of that commodity

a. Opportunity cost of producing one bushel of wheat in Richland:

Producing 3 bushels of wheat = 1 barrel of wine is foregone

=> One bushel of wheat = 1/3 barrels of wine

b. The opportunity cost of producing one barrel of wine in Richland:

Producing 1 barrel of wine =3 bushels of wheat is foregone

=> 1 barrel of wine = 3 bushels of wheat

c. The opportunity cost of producing one bushel of wheat in Prosperity:

Producing 1 bushels of wheat = 2 barrel of wine is foregone

=> One bushel of wheat = 2 barrels of wine

d. The opportunity cost of producing one barrel of wine in Prosperity?

Producing 2 barrels of wine =1 bushels of wheat is foregone

=> 1 barrel of wine = 1/2 bushels of wheat