Question

Q.4 (18 points) Suppose that Germany and France both produce cheese and wine. The amount of production of the two countries are shown in the following table. Assume that the opportunity cost is constant. Daily production Produce cheese only (pounds) Produce wine only (bottles) Germany 300 1.50 France 150 100 (a) Draw the PPF for Germany. Put cheese on the vertical axis, and wine on the horizontal axis. Indicate the values of both intercepts. (b) Which country has the absolute advantage in producing cheese? (c) Complete the following table (don't forget the units) Opportunity cost of producing 1 pound of cheese I bottle of wine Germany France (d) Which country has the comparative advantage in producing wine? (e) For each of the following prices, determine if France will be willing to trade. Also, determine if Germany will be willing to trade. (i) The price of 1 bottle of wine is 3 pounds of cheese. (ii) The price of 1 bottle of wine is 1 pound of cheese. (i) The price of 1 bottle of wine is 1.8 pound of cheese. ( Now France improves cheese production technology, it can now produce a maximum of 180 pounds of cheese per day. The new amount of production is shown in the following table. Daily production Produce cheese only (pounds) Produce wine only (bottles) Germany 300 150 France 180 100 Find the new range of price of a bottle of wine such that both Germany and France will be willing to trade. Then explain why Germany benefits less when France has better cheese production technology.

Answer 1

CLASSTIMELP Date 70 3) Yermany eum of T-8 cheese Cheese 300 Wine has an absolute as advantage in both good ie Cheese 4 'wine both. opport of producing 'pout of cheese botte of wine Germany oos wani 2 cheese France 0.667 arne 1-2o cheese TOT. oswan ci cheese co-66 turne ie I bottle of wine = 1.Sport of d) Germany has CA in cheese and France hos CA in were opp cost of wree in Germany - scheese of wine in France - 1.8cheens. Benlficul Bade. Ans is C Cheest. 1 <line <a cheesh