Goods

Computer Wine
x Y
Qc Qw
Country mil mil gal
US 60 240
France 33 1/3 200

Assuming that without trade,
-the US Produces 30 million computers, and
- France produces 80 million gallons of wine.

Also assuming that
-both countries will completely specialize in the good in which they have a comparative advantage,
-they will trade with one another using the following terms of trade:
1 computer = 5 gallons of wine,
-the US has 120 million gallons of wine to consume after trade.
Which of the following statements is true?
a. Without trade, France will produce 30 million computers.
b. The US will specialize in wine and produce 120 million gallons of wine.
c. After specialization and trade, France will have 100 million gallons of wine and 20 million computers to consume.
d. After specialization and trade, the US will have 120 million gallons of wine and 36 million computers to consume.

Take a shot, what do you think?

To determine which statement is true, we need to analyze the information provided and follow the principles of comparative advantage and terms of trade.

Step 1: Calculate the opportunity cost:
- To determine which country has a comparative advantage in which good, we need to calculate the opportunity cost of producing each good.
- The opportunity cost is calculated by dividing the units of one good that could be produced by the units of the other good that must be sacrificed.
- For the US: Opportunity cost of producing 1 computer = 240 million gallons of wine / 60 million computers = 4 gallons of wine per computer.
- For France: Opportunity cost of producing 1 computer = 200 million gallons of wine / (33 1/3 million computers) = 6 gallons of wine per computer.

Based on the opportunity cost, the US has a comparative advantage in producing computers, and France has a comparative advantage in producing wine.

Step 2: Determine specialization and production after trade:
- According to the principle of comparative advantage, each country should specialize in producing the good in which they have a comparative advantage.
- The US will specialize in producing computers, and France will specialize in producing wine.

Step 3: Determine the terms of trade:
- The terms of trade are given as 1 computer = 5 gallons of wine.
- This means that for every computer the US exports, they will receive 5 gallons of wine in return.

Step 4: Calculate the post-trade consumption:
- Given that the US has 120 million gallons of wine to consume after trade, and the terms of trade are 1 computer = 5 gallons of wine, the US can trade 24 million computers (120 million gallons / 5 gallons per computer) for wine.
- For France, they will trade 24 million computers for wine, which means they will receive 120 million gallons of wine.

Now, let's analyze each provided statement:

a. Without trade, France will produce 30 million computers.
- This statement is not true because France has a comparative advantage in producing wine, not computers.

b. The US will specialize in wine and produce 120 million gallons of wine.
- This statement is not true because based on the principles of comparative advantage, the US specializes in producing computers.

c. After specialization and trade, France will have 100 million gallons of wine and 20 million computers to consume.
- This statement is not true because after trade, France will have 120 million gallons of wine (not 100 million) and no computers to consume since they specialized in producing wine.

d. After specialization and trade, the US will have 120 million gallons of wine and 36 million computers to consume.
- This statement is true because the US specializes in producing computers and can trade 24 million computers for 120 million gallons of wine.

Therefore, the correct answer is d. After specialization and trade, the US will have 120 million gallons of wine and 36 million computers to consume.