This table shows the number of labor hours required to produce a digital camera and a bushel of wheat in China and South Korea.
Digital Camera Wheat
(bushels ) Quantity of Digital Camera Quantity of Wheat
China 100 hours 5 hours 90 1800
South Korea 90 hours 3 hours 100 3,000
a- Suppose the two countries specialize and trade. Who should produce digital cameras and who should produce wheat? Explain your answer.
b- Draw the production possibilities frontier for each country. Put "Digital Camera" on the horizontal axis and "Wheat" on the vertical axis. Be sure to identify the intercept values on your graphs.
c- Suppose each country allocates 60% its labor hours to wheat production and 40% to the production of digital cameras. China will produce 36 digital camera and 1,080 wheat and South Korea 40 digital camera and 1,800 wheat. If the two countries do not trade and consume whatever they produce, identify the current production and consumption point for each country on their respective production possibilities frontiers. Label China’s consumption point “C” and South Korea’s consumption point, “K.
d- Suppose China and South Korea agree to trade so that in exchange for 1,200 bushels
of wheat, the exporter of wheat receives 48 digital cameras. Show the consumption points after trade on each country’s production possibilities frontier. Label these points “B” for China and “J” for Korea
In the first place, with no spaces or division I can not be sure what goes where.
Sra
a- To determine which country should produce digital cameras and which should produce wheat, we need to compare the opportunity costs of production in each country. The opportunity cost is defined as the value of the next best alternative that must be sacrificed in order to choose one option over another.
In China, to produce 1 digital camera, it takes 100 labor hours, while to produce 1 bushel of wheat, it takes 5 labor hours. Therefore, the opportunity cost of producing 1 digital camera in China is 5 bushels of wheat (100 labor hours / 5 labor hours).
In South Korea, to produce 1 digital camera, it takes 90 labor hours, while to produce 1 bushel of wheat, it takes 3 labor hours. Therefore, the opportunity cost of producing 1 digital camera in South Korea is 3 bushels of wheat (90 labor hours / 3 labor hours).
Comparing the opportunity costs, we can see that China has a higher opportunity cost for producing digital cameras (5 bushels of wheat) compared to South Korea (3 bushels of wheat). This means that China is relatively more efficient in producing wheat compared to digital cameras, while South Korea is relatively more efficient in producing digital cameras compared to wheat.
Based on this analysis, China should specialize in wheat production, while South Korea should specialize in digital camera production. This will allow each country to focus on producing the good in which they have a comparative advantage, leading to overall gains from trade.
b- To draw the production possibilities frontier (PPF) for each country, we need to plot the combination of digital cameras and wheat that each country can produce given their labor hours allocations.
For China, the intercept of the PPF for digital cameras is 1800 (quantity of wheat) on the horizontal axis, and 90 (100 labor hours) on the vertical axis. The intercept for wheat is 1800 (quantity of wheat) on the vertical axis, and 90 (5 labor hours) on the horizontal axis.
For South Korea, the intercept of the PPF for digital cameras is 3000 (quantity of wheat) on the horizontal axis, and 100 (90 labor hours) on the vertical axis. The intercept for wheat is 3000 (quantity of wheat) on the vertical axis, and 100 (3 labor hours) on the horizontal axis.
Connecting the intercept values with a curve will result in the production possibilities frontiers for each country. The curve will show the trade-off between producing digital cameras and wheat given the limited resources (labor hours) in each country.
c- To identify the current production and consumption points for each country on their respective production possibilities frontiers, we need to allocate the given labor hours proportionally to the production of digital cameras and wheat according to the given percentages.
For China, with 40% of labor hours allocated to digital cameras and 60% to wheat, and assuming the total labor hours are 100, we can calculate:
40% of 100 labor hours = 40 labor hours allocated to digital cameras
60% of 100 labor hours = 60 labor hours allocated to wheat
Using the given labor hour requirements, we can determine the quantity of digital cameras and wheat produced:
Digital cameras in China = 40 labor hours / 100 hours per camera = 0.4 cameras
Wheat in China = 60 labor hours / 5 hours per bushel = 12 bushels
For South Korea, with 40% of labor hours allocated to digital cameras and 60% to wheat, and assuming the total labor hours are 90, we can calculate:
40% of 90 labor hours = 36 labor hours allocated to digital cameras
60% of 90 labor hours = 54 labor hours allocated to wheat
Using the given labor hour requirements, we can determine the quantity of digital cameras and wheat produced:
Digital cameras in South Korea = 36 labor hours / 90 hours per camera = 0.4 cameras
Wheat in South Korea = 54 labor hours / 3 hours per bushel = 18 bushels
These production points represent the current production levels for each country, and we can use them to plot the consumption points on their respective production possibilities frontiers. Label China's consumption point as "C" and South Korea's consumption point as "K".
d- After trade, China and South Korea agree to exchange 1,200 bushels of wheat for 48 digital cameras. This means that China is the exporter of wheat, and South Korea is the exporter of digital cameras.
To show the consumption points after trade on each country's production possibilities frontier, we need to reallocate the resources based on the terms of trade.
For China:
Before trade: China produces 0.4 digital cameras and 12 bushels of wheat. This represents point "C" on China's production possibilities frontier.
After trade: China trades 1,200 bushels of wheat for 48 digital cameras. This means China reduces its wheat production by 1,200 bushels and increases its digital camera production by 48 cameras.
Digital cameras in China after trade = 0.4 + 48 = 48.4 cameras
Wheat in China after trade = 12 - 1,200 = -1,188 bushels
Due to the negative wheat production, China will need to import wheat to meet its consumption needs. We can label this consumption point as "B" for China.
For South Korea:
Before trade: South Korea produces 0.4 digital cameras and 18 bushels of wheat. This represents point "K" on South Korea's production possibilities frontier.
After trade: South Korea trades 48 digital cameras for 1,200 bushels of wheat. This means South Korea reduces its digital camera production by 48 cameras and increases its wheat production by 1,200 bushels.
Digital cameras in South Korea after trade = 0.4 - 48 = -47.6 cameras
Wheat in South Korea after trade = 18 + 1,200 = 1,218 bushels
Due to the negative digital camera production, South Korea will need to import digital cameras to meet its consumption needs. We can label this consumption point as "J" for South Korea.
These new consumption points after trade reflect the impact of specialization and trade on each country's production possibilities and consumption levels.