Question

Suppose that France and Germany both produce schnitzel and wine. The following table shows combination of the goods that each country can produce in a day 2. France Germany Wine Schnitzel Wine Schnitzel bottles)(pounds) (bottles)(pounds) 15 12 Who has comparative advantage in producing wine? Who has the comparative advantage in producing schnitzel? Explain Suppose France is currently producing 1 bottle of wine and 6 pounds of schnitzel, and Germany is currently producing 3 bottles of wine and 6 pounds of schnitzel. Demonstrate that France and Germany can both be better off if they specialize in producing only one good and then trade for the other. a. b.

Answer 1

a) We can show marginal rate of substitution for two goods separately in two tables as shown below:

Wine (bottles)	France Schnitzel (Pounds)	Marginal Rate of Substitution (MRS)
0	8	-
1	6	2:1
2	4	2:1
3	2	2:1
4	0	2:1

     1,1

Wine (bottles)	Germany Schnitzel (pounds)	Marginal Rate of substitution(MRS)
0	15	-
1	12	3:1
2	9	3:1
3	6	3:1
4	3	3:1
5	0	3:1

                                          1.2

Here marginal Rate of Substitution for all combinations is constant at 2:1 in table 1.1

and 3:1 in Table 1.2. Therefore, marginal rate of substitution for Germany is higher than France. Therefore, France has comparative advantage in producing wine. Also Germany has comparative advantage in producing Schnitzel.

b) It is given, France is currently producing 1 Wine bottle + 6 pounds of Schnitzel and Germany 3 wine bottles + 6 pounds of Schnitzel daily.

From table 1.1 and table 1.2 shown in a), it is clear that MRS for all combination of Wines and Schnitzel remains the same, which means utility level is same for both France and Germany. As shown in a), France should specialize in producing Wine and Trade Schnitzel and Germany in producing Schnitzel and trade wine for efficient production level.