Question

(i) Opportunity cost (OC) is defined as the amount of a commodity given up to consume another commodity.

For Home country, in terms of widgets OC is 400/200 = 2 i.e. 1 cloth is given up for 2 of widgets

(ii) Comparative advantage is the ability to produce a good more efficiently than others.

Home is (200/120=5/3) times better at cloth while (400/60=20/3) better at widget.

So,home has comparative advantage in widgets. Thus foreign has comparative advantage in cloth.

(iii) Following Ricardian model,

Home will produce and export Widgets while foreign will produce and export cloth.

cost ratio for widget : 400/6 = 20/3 cost ratio for cloth = 200/120= 5/3 as shown above.

In absence of trade in Home, 200C/400W = 0.5C :1 W. As TOT is 1:1 (given), trade causes Home to consume 0.5 units of C more. Similarly for foreign,when no trade, 60W/120C = 0.5 2 : 1 C. After trade foreign can consume 0.5 units of W more. So, trade beneficial for both.

When countries trade using Ricardian model, both the country's consumption frontier expands as it exports the commodity it has CA in and imports the other commodity more in quantity than it would do if it produced alone.

(iv) For cloth, WH/WF = 200/120 = 5/3 . For Widget, WH/WF = 400/60 = 20/3

vi)

a) No. As doubling both cloth and widget production simultaneously will not change the ratio of OC.

b) Same as (a).

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