Shown below are the production possibilities curves for two nations: the United States and Chile. Suppose...

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Answer 1

Answer #1

Solution:

1. Opportunity cost of United States for wheat = 1/4 copper (thousands of pounds). This is because USA can produce either 8 million tons of wheat or 2 thousands of pounds of copper.

Opportunity cost of United States for copper = 4 wheat (millions of tons).

2. Opportunity cost of Chile for wheat = 1/2 copper (thousands of pounds). This is because Chile can produce either 4 million tons of wheat or 2 thousands of pounds of copper.

Opportunity cost of Chile for copper = 2 wheat (millions of tons).

3. The countries can gain from trade through specialisation. Since USA has absolute advantage in wheat and is at par in respect of copper with Chile, it has comparative advantage in wheat and Chile has comparative advantage in copper.

4. Chile could produce 2 units of wheat in place of 1 unit of copper. If it gets 3 units of wheat from USA, Chile gains 1 unit of wheat from this trade. USA could produce 3/4 unit of copper in place of 3 units of wheat. So gain to USA from trade is (1-3/4)= 0.25 units of copper.

5. Limit on trade is as follows: USA can not exchange more than 4 units of wheat for 1 unit of copper and chile can not exchange less than 2 units of wheat for 1 unit of copper. Hence, 4W>1C>2W is the limit.

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Shown below are the production possibilities curves for two nations: the United States and Chile. Suppose...

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