Question

can produce 12 The Dominican Republic and Nicaragua both produce coffee and rum. The Dominican Republic can produce 20 thousand tons of coor 4 round bars thousand tons of coffee or 2 thousand barrels of rum per year. a. Suppose the Dominican Republic and Nicaragua sign a trade agreement in which each country would special in the production of the Which country should specialize in coffee? Click to select Which country should specialize in rum? Click to set Instructions: Round your answer to three decimal places tons of barrels of rum, and the maximum price is b. The minimum price at which these countries will trade coffee is

Answer 1

A) Dominican republic can produce either 20 thousand tons of coffee or 4 thousands barrels of rum. It's opportunity cost of producing 1 ton coffee is (4/20) = 0.2 barrel of rum and opportunity cost of producing 1 barrel of rum is (20/4) = 5 tons of coffee.

Nicaragua can produce either 12 thousands tons of coffee or 2 thousands barrels of rum. It's opportunity cost of producing 1 ton of coffee is (2/12) = 0.167 barrel of rum and opportunity cost of producing 1 barrel of rum is (12/2) = 6 tons of coffee.

As Dominican republic's opportunity cost of producing 1 barrel of rum is less than that of Nicaragua's, so Dominican republic has comparative advantage in the production of rum. And, Nicaragua has comparative advantage in the production of the other good that is, coffee.

If both countries sign a trade agreement, then both countries should specialize in the production in which they have comparative advantage in order to gain from trade. Therefore Dominican republic should specialize in the production of rum and Nicaragua should specialize in the production of coffee.

B) To gain from trade, price of 1 ton of coffee should lie between both country's opportunity cost of producing 1 ton of coffee.

There, the minimum price at which these countries will trade coffee is 0.167 barrel of rum and the maximum price is 0.2 barrel of rum.