Question

	aL in wine (bottles)	aL in cheese (kilos)
Vintland	15	10
Moonited Republic	10	4

Vintland has 30 million hours of labor. Moonited Republic has 20 million hours of labor.

Questions:

a. Graph each country’s production- possibility curve with cheese on the horizontal axis. You can keep the scale in millions.

b. Which good does Vintland export under free trade?

c. Which good does Moonited Republic export under free trade?

d. If the equilibrium free trade relative price of cheese is ½ bottle of wine per kilo of cheese, what is the quantity of cheese produced in Vintland?

e. If the equilibrium free trade relative price of cheese is ½ bottle of wine per kilo of cheese, what is the quantity of wine produced in Vintland?

f. If the equilibrium free trade relative price of cheese is ½ bottle of wine per kilo of cheese, what is the quantity of cheese produced in Moonited Republic?

g. If the equilibrium free trade relative price of cheese is ½ bottle of wine per kilo of cheese, what is the quantity of wine produced in Moonited Republic?

h. Does Vintland gain from trade? Explain referring to your graph.

i. Does Moonited Republic gain from trade? Explain referring to your graph.

Answer 1

a. Vintland has 30 million hours of labor. If all resources are used in production of wine then wine production = 30/15 = 2 millions

Similarly, if all resources are used in production of cheese then cheese production = 30/10=3 millions

Without trade, for equilibrium , Vintland may produce equal amounts of wine and cheese. Suppose production of wine is denoted by x and that of cheese is denoted by y,

then, x+y =30 and x/15=y/10 are the two equations ,

Putting x=1.5y in x+y=30

we get, 2.5y=30

or, y =12

and x=30-12=18

Then time in wine production = 18/15 =1.2 million

and time in cheese production= 12/10=1.2million

Moonited Republic has 20 million hours of labor. If all resources are used in the production of wine then wine production= 20/10 = 2 million

Similarly, if all resources are used in production of cheese then cheese production = 20/4 = 5 million

Without trade , Moonited Republic may produce equal quantities of wine and cheese.Suppose production of wine is denoted by x and that of cheese is denoted by y,

then x+y=20 and x/10=y/4 are the two equations,

Putting x=2.5y in x+y=20,

we get, 3.5y=20

or, y =5.7

and x= 20-5.7=14.29

Then time in wine production = 14.29/10=1.4 million

and time in cheese production = 5.7/4=1.4 million

Plotting all these points with production of wine on the vertical axis and production of cheese on the horizontal axis, PPF curves for both Vintland and Moonited Republic are shown below:

b. For Vintland , opportunity cost for producing wine in terms of cheese = 10/15 = 2/3

and opportunity cost for producing cheese in terms of wine = 15/10=3/2

Similarly, for Moonited Republic opportunity cost of producing wine in terms of cheese = 4/10=2/5

and opportunity cost of producing cheese in terms of wine = 10/4=5/2

As opportunity cost of producing cheese is lower for Vintland, it has comparative advantage in production of cheese . Hence, under free trade, Vintland will specialize in production of cheese and export cheese and import wine.

c. From b , it is seen that opportunity cost of producing wine is lower for Moonited Republic . Thus, it has comparative advantage in production of wine. As a result, under free trade , Moonited Republic will specialize in production of wine and export wine and import cheese.

d. Under free trade Vintland will only produce cheese while Moonited Republic will only produce wine.Vintland will produce 3 millions of cheese and Moonited Republic will produce 2 millions of wine.