Below is the production possibility information of small nations Arboc and Arbez, which can produce two goods, wheat, and coffee. The maximum quantity of each good is shown in the table below. Assume the two nations trade in a world containing many small nations. Costs are constant within each country.
ARBOC
WHEAT and COFFEE
120 and 0
0 and 30
ARBEZ
WHEAT and COFFEE
120 and 0
0 and 20
1. What is the opportunity cost of one unit of wheat in Arboc?
2. What is the opportunity cost of one unit of wheat in Arbez?
3. Which country has a comparative advantage in the production of wheat?
4. What is the opportunity cost of one unit of coffee in Arboc?
5. What is the opportunity cost of one unit of coffee in Arbez?
6. Which country has a comparative advantage in the production of coffee?
7. Based only on comparative advantage,
Arboc should produce which good?
Arbez should produce which good?
8. The terms of trade are 2 units of wheat per unit of coffee,
Arboc should produce which good?
Arbez should produce which good?
9. The terms of trade are 5 units of wheat per unit of coffee,
Arboc should produce which good?
Arbez should produce which good?
10. The terms of trade are 6 units of wheat per unit of coffee. Which country could not gain from trade?
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1. To find the opportunity cost of one unit of wheat in Arboc, we need to compare the amount of coffee that Arboc can produce given up for one unit of wheat. From the production possibility table, we can see that Arboc can produce 120 units of wheat by giving up 0 units of coffee. Therefore, the opportunity cost of one unit of wheat in Arboc is 0 units of coffee.
2. Similarly, to find the opportunity cost of one unit of wheat in Arbez, we compare the amount of coffee that Arbez can produce given up for one unit of wheat. From the production possibility table, we can see that Arbez can produce 120 units of wheat by giving up 0 units of coffee. Therefore, the opportunity cost of one unit of wheat in Arbez is 0 units of coffee.
3. Comparative advantage is determined by comparing opportunity costs. Since the opportunity cost of one unit of wheat is the same in both Arboc and Arbez (0 units of coffee in both cases), neither country has a comparative advantage in the production of wheat.
4. To find the opportunity cost of one unit of coffee in Arboc, we need to compare the amount of wheat that Arboc can produce given up for one unit of coffee. From the production possibility table, we can see that Arboc can produce 0 units of wheat by giving up 30 units of coffee. Therefore, the opportunity cost of one unit of coffee in Arboc is 30 units of wheat.
5. Similarly, to find the opportunity cost of one unit of coffee in Arbez, we compare the amount of wheat that Arbez can produce given up for one unit of coffee. From the production possibility table, we can see that Arbez can produce 0 units of wheat by giving up 20 units of coffee. Therefore, the opportunity cost of one unit of coffee in Arbez is 20 units of wheat.
6. Comparative advantage is determined by comparing opportunity costs. Since the opportunity cost of one unit of coffee is lower in Arbez (20 units of wheat) compared to Arboc (30 units of wheat), Arbez has a comparative advantage in the production of coffee.
7. Based on comparative advantage:
- Arboc should produce wheat because it does not have a comparative advantage in coffee production.
- Arbez should produce coffee because it has a comparative advantage in coffee production.
8. Given the terms of trade of 2 units of wheat per unit of coffee, Arboc should produce coffee because it has a lower opportunity cost (30 units of wheat) compared to Arbez (20 units of wheat) for producing coffee. Arbez should produce wheat because it has a lower opportunity cost (20 units of wheat) compared to Arboc (30 units of wheat) for producing wheat.
9. Given the terms of trade of 5 units of wheat per unit of coffee, Arboc should produce wheat because it has a lower opportunity cost (30 units of wheat) compared to Arbez (20 units of wheat) for producing wheat. Arbez should produce coffee because it has a lower opportunity cost (20 units of wheat) compared to Arboc (30 units of wheat) for producing coffee.
10. Given the terms of trade of 6 units of wheat per unit of coffee, both countries can gain from trade. Arboc can gain by producing wheat and trading it for coffee (1 unit of coffee for 6 units of wheat is a better deal than the opportunity cost of 1 unit of coffee in Arboc, which is 30 units of wheat). Arbez can gain by producing coffee and trading it for wheat (1 unit of wheat for 1/6 unit of coffee is a better deal than the opportunity cost of 1 unit of wheat in Arbez, which is 20 units of coffee). Therefore, both countries can gain from trade.