Question

The Dominicen Republic and Nicaragua both produce coffee and rum. The Dominican Republic can produce 20 thousand tons of ofee or 4 tons of colfee or 2 thousand barrels of rum per year. thousand barmels of rum per year. Nicaragua can produoe 12 thousand Dominican Republic and Nicaragua sign a trade agreement in which each country would specialize in the production of either coffee or rum Which country shouls specialize in coffee? (Cles to en Which country should specialize in rum? ICick sele Instructions: Round your answer to three decimal places b. The minimum price at which these countries will trade coffee is ton per baral of rum, and the mximum price is ton per barmel of rum

Answer 1

STEP BY STEP SOLUTION

STEP-1

PRODUCTION POSSIBILITY FRONTIER:

It is a curve that depict all maximum output possibilities for two goods, set of inputs including resources and other factors.

the production possibility frontier presumes all inputs are utilized effectively.

STEP-2

a. THE COUNTRY THAT SHOULD BE SPECIALIZED IN COFFEE IS MENTIONED BELOW:

if the DM Republic and NR form a trade contract where every nation would focus in production, rum and coffee will be produced according to which country has a comparative advantage in the production of each good.

In comparison of the opportunity costs for producing coffee, it is known that NR has a lesser opportunity charge to produce coffee (0.17 (1/6) of a rum barrel, versus the DM Republic's  

opportunity cost of 0.5 (1/2) rum barrel). Hence, NR should be specialized in the coffee.

In comparison of the opportunity costs for producing rum, it is determine that the DM Republic has the lesser opportunity cost for preparing rum (2 (2/1) tons of coffee, versus 6 ( 6/1) tons for NR). Hence, DM nation should be specialized in preparing rum.

STEP-3

b.

Minimum price:

The countries should trade at 0.17 (1/6) of a rum barrel.

The minimum price of coffee is 0.17 of barrel.

STEP-4

Maximum price:

The countries should trade at 0.500 (1/2) if a rum barrel

The maximum price of coffee is 0.5 of barrel. if anything lesser than 1.6, NR should offer its coffee for lesser amount. if anything is more than 1/2, the DM Republic can offer its own coffee for lesser price.