Question

Consider two countries, A and B. Each country produces only two goods with 1,000 production units: Wine and Cheese. Country A can produce 400 bottles of wine or 200 pounds of cheese or any combination of two goods.

At the same time, country B can produce 1200 bottles of wine or 300 pounds of cheese or any combination of two goods. Suppose that both countries maximize their utility when they consume wine and cheese in equal proportions.

1.     

a) Absolute Advantage

b) Comparative Advantage

c) Trade-off of wine for cheese

2.      Production and consumption situations in both countries before trade

3.      Production and consumption situations in both countries after trade with the barter exchange rate of three bottles of wine for one pound of cheese.

All question elements have been included. Please provide detailed answer in organized manner.

Answer 1

1. a) country B has absolute advantage in both the commodities for wine and cheese because country B produce both commodities in greater quantity.

b) Country B has comperative advantage in production of wine because to produce one more unit of wine the country B need to sacrifice only 1/4 unit cheese, whereas country A need to sacrifice 1/2 unit of cheese.

Country A has comperative advantage in production of cheese because to produce one more unit of wine the country A need to sacrifice only 2 units of wine, whereas the country B need to sacrifice 4 units of wine.

c) The country A trade off for wine is 1/2 cheese and country B trade off for wine is 1/4 cheese.

2) production before trade

Wine. Cheese

Country A. 400. 200

Country B. 1200. 300

3) Production after trade.

Wine. Cheese

Country A. 0. 400

Country B. 2400. 0.