Question

1.2. What is the opportunity cost of doughnuts in terms of croissants at Springfield? What is the opportunity cost of doughnuts in terms of croissants in Springmedow? Explain why and support your answers with calculations. 1.3. Which product will Springfield export and which product will Springmedow export? Explain why 2. Within the context of the Ricardian model, a country produces two goods, X and Y. If the relative price of X is 0.75 and MPLY = 3, what is the value of MPLx? Support your answers with calculations.

Answer 1

Solution 1

1.1 The absolute advantage is defined the superiority of a country to produce more of 1 good than other country. The absolute advantage in production of doughnuts is the ability to produce more number of doughnuts in absolute terms. Similarly the absolute advantage in production of croissants is the ability to produce more number of croissants in absolute terms than other country.

Here in the above question, SPRINGFIELD can produce 4 doughnuts per hour while SPRINGMEDOW can produce only 2 in the same time. Hence SPRINGFIELD has an absolute advantage in production of doughnuts.

Similarly, SPRINGFIELD can produce 6 croissants in one hour while at the same time SPRINGMEDOW can produce 8 croissants. Hence SPRINGMEDOW has an absolute advantage in production of croissants.

1.2 The opportunity cost of doughnuts in terms of croissants is calculated by dividing total production of croissants by total production of doughnuts for each country. It shows us how much of croissants needs to be given up to produce an extra unit of doughnut.

For country SPRIMGFIELD = 6/4= 3/2 which means for every 1 unit of doughnut production SPRINGFIELD needs to give up 3/2 units of croissants.

For country SPRINGMEDOW = 8/2 = 4 which means for every 1 units of doughnut production SPRINGMEDOW needs to give up 4 units of croissants.

1.3 As we can see from above part that the opportunity cost of producing doughnuts is higher in SPRINGFIELD as compared to SPRINGMEDOW which suggest that its lest costlier for SPRIMGFIELD to produce doughnuts than SPRINGMEDOW. So, SPRINGFIELD must produce only doughnuts and while SPRINGMEDOW should only produce croissants. One another way to look at it as check for the opportunity cost producing croissants in terms of doughnuts in each country just like we did for doughnuts .

opportunity cost of croissants in terms of doughnuts in SPRIMGFIELD = 4/6= 2/3 which means to produce 1 unit of croissant SPRINGFIELD must give up 2/3 units of doughnuts.

similarly, opportunity cost of producing croissants in terms of doughnuts in SPRINGMEDOW= 2/8= 1/4 which means that to produce 1 unit of croissant SPRINGMEDOW must give up 1/4 units of doughnuts.

We can now see that opportunity cost of producing croissants in less in SPRINGMEDOW than SPRIMGFIELD. Hence it is efficient for SPRINGMEDOW to produce only croissants.

So, finally SPRINGFIELD will only produce doughnuts and SPRINGMEDOW will only produce croissants if trade is allowed to happen and they will export the same good they can produce less costly. That is to say SPRINGFILED will export doughnuts and SPRINGMEDOW will export croissants.

SOLUTION 2

According to Ricardian model relative price of X in terms of Y is equals to opportunity cost of X in terms of Y. Mathematically

Px/Py= MPLx/MPLy and we know the relative price X is 0.75 and MPLy=3 we can solve for MPLx.

0.75=MPLx/3 = MPLx = 0.75x3= 2.25.