Question

Question 19 (1 point) Consider Iran and Iraq and their production of oil and olive oil. Relatively recent OPEC estimates indicate that in July 2012. Iran produced about 4.1 million barrels of oil per day and Irag produced about 3.2 million barrels of oil per day, making them the second- and third-largest oil producers in OPEC, behind Saudi Arabia (and the 4th and 7th largest oil producing countries in the world). Suppose that Iran and Iraq both produce barrels of oil and bottles of olive oil, which are sold for the same price in both countries. These are the combinations of the two goods that each country can produce in one day using the same amounts of capital and labor (with all measures in millions throughout): Iran Olive Oil (Bottles) Iraq Olive Oil (Bottles) Oil (Barrels) Oil (Barrels) UA Suppose that without specialization, Iran produces 4 barrels of oil and 6 bottles of olive oil, and Iraq produces 4 barrels of oil and 4 bottles of olive oil in millions per day). Are the countries better off or worse off with specialization and trade? Suppose that the terms of trade with specialization are 4 barrels of oil for 4.5 bottles of olive oil, and that 4 barrels of oil are indeed traded for 4.5 bottles of olive oil. With specialization and trade, how many additional barrels of oil can the two countries produce (when considered together)? Provide your answer as a number measured in millions rounded to two decimal places. Use "-" to indicate negative amounts. Do not include any symbols, such as "$." "=," "%," or "," in your answer. Your Answer:

Answer 1

The opportunity cost of 1 barrel of oil is 3/2 = 1.5 bottles of olive oil in Iran and 2/2 = 1 bottle of olive oil in Iraq. This implies that Iraq has comparative advantage in production of oil and Iran has comparative advantage in production of olive oil. Without trade, Iraq produces 4 bottles of olive oil and 4 barrels of oil and Iran produces 6 bottles of olive oil and 4 barrels of oil. In total, there are 10 bottles of olive oil and 8 barrels of oil produced by both nations. After specialization, Iraq now produces 8 barrels of oil and Iran produces 12 bottles of olive oil, in accordance with their comparative advantage. Hence, the same number of barrels of oil is produced after specialization which means trade and specialization does not increase the production of oil. The answer is 0.