Question

1. The following table shows the outputs per worker per day in two countries that can produce two goods, bicycles & coffeemakers, only:

                                     Bicycles                            Coffeemakers

Ambrosia                                20                                            10

Bandaria                                 2                                              5

Ambrosia has 100 workers & Bandaria has 100 workers.

1. Draw the production possibility frontiers for the two countries (output per day).
2. Which country has the absolute advantage in producing the bicycles, and which one has the absolute advantage in producing the coffeemakers?
3. Which country has the comparative advantage in producing the bicycles, and which one has the comparative advantage in producing the coffeemakers?
4. If, as autarkies, each country decided to use half of its workers in the production of the bicycles and half of its workers to produce the coffeemakers, what would be the outputs?
5. If the two countries are open to trade, which one will sell the bicycles and buy the coffeemakers?
6. What will be the terms of trade? That is, how many bicycles will be offered in exchange for a coffeemaker?
7. Draw a world production possibility frontier (that is, the maximum combinations of the bicycles & coffeemakers produced by two countries together).
8. Show, on the graph in question g , the world production (the combination of the aggregate productions of the bicycles & the coffeemakers) the autarkies (from question d ) generate.
9. Explain, in your own words, what you could conclude from the diagram that you have created to answer question h (i.e., the aggregate autarky production compared to the world production possibility frontier.

Answer 1

With 100 workers, each country will produce

	Bicycles	Coffeemakers
Ambrosia	2000	1000
Bandaria	200	500

b) Ambrosia has the absolute advantage in producing both the goods

c) The opportunity cost of producing Coffeemakers for

Ambrosia = 20/10 =2

Bandaria = 2/5 = 0.4

The opportunity cost of producing Bicycles for

Ambrosia = 10/20 = 0.5

Bandaria = 5/2 = 2.5

So, Bandaria has a comparative advantage in producing Coffeemakers and Ambrosia has a comparative advantage in producing Bicycles

d) In autarky, Ambrosia will produce 50*20 = 1000 bicycles and 500 coffeemakers

Bandaria will produce 100 bicycles and 250 coffeemakers

e) When trade is open, Ambrosia will produce bicycles and buy the coffeemaker from the Bandaria

As per Chegg guidelines, more than four parts are answered.