Question

Suppose that Hopeland and Faithland have the output figures contained in the below table, shown in terms of productivity per worker.
  


AVERAGE PRODUCT PER WORKER

  Country
Wheat

Wine

  Hopeland
3 bushels
or
1 barrels

  Faithland
1 bushel
or
2 barrels

      
a. Assume that the costs and productivity remain constant. What is the opportunity cost of producing wheat and wine in Hopeland and Faithland?

     Instructions: Round your answers to 2 decimal places.



Hopeland
Faithland

  1 wheat =
__________ wine      
__________ wine      

  1 wine   =
__________ wheat    
__________ wheat    

   

b. In which product does each country have a comparative advantage?
   
     Hopeland: (wheat, wine)
     Faithland: (wine, wheat)

c. Suppose that the labor force in Hopeland is 20 million and in Faithland 10 million. Show, in a table with five columns, the production possibilities of each country. (Suggestion: use 100% labor to produce wheat at A, and to produce wine at E; and then split labor as 75:25, 50:50 and 25:75 for B, C and D, respectively to produce both goods)

    Instructions: Round your value to 1 decimal place.

                   Hopeland's Production Possibilities (in millions of units)       

A
B
C
D
E

  Wheat
__________
__________
__________
__________
__________

  Wine
0
__________
__________
__________
__________

    
           Faithland's Production Possibilities (in millions of units)

A
B
C
D
E

  wheat
__________
__________
  __________
  __________
  __________

  wine
0
  __________
  __________
  __________
  __________

  
d. Assume that each country is now producing combination C. What are their present joint output totals?

      Joint totals: __________ wheat and __________ wine.

e. Suppose that each country specializes in the product in which it has a comparative advantage. What will be the new output totals, and what will be the gains from trade?

     Instructions: Round your gain value to 1 decimal place.
  
     New joint totals: __________ wheat (in Hopeland) and __________ wine (in Faithland)    

      Gains:              __________ wheat and ______________ wine
  
f. Suppose that the two countries establish the terms of trade at 1 wine = 2 wheat, and Hopeland decides to trade 15 wheat to Faithland. What will be the consumption totals for the two countries?

     Instructions: Round your values to 1 decimal place.

       Hopeland: __________ wheat; __________ wine
         
       Faithland: __________ wheat; __________ wine

Answer 1

A) opportunity cost of wheat in hopeland =1/3=0.33

Opportunity cost of wine in hopeland=3/1=3

Opportunity cost of wheat in faitherland=2/1=2

Opportunity cost of wine in faitherland=1/2=0.5

B) Hopeland has lower opportunity cost in wheat than faitherland ,so it has comparitive advantage in wheat.

Faitherland has lower opportunity cost in wine than hopeland,so it has comparitive advantage in wine.

C)

D) Joint total of wheat =30+5=35 million bushels

Joint total of wine=10+10=20 million gallons