Homework Answers
2.
A.
Canland has absolute advantage in both the goods due to higher output level and superior efficiency.
Regarding comparative advantage,
For Autalia, opportunity cost of producing turkey = 30000/2000 = 15 units of chicken
For Canland, opportunity cost of producing turkey = 50000/10000 = 5 units of Chicken
So, Canland has comparative advantage in producing turkeys, as it has relatively lower opportunity cost in producing turkeys. Autalia has comparative advantage in producing chicken , as it has relatively lower opportunity cost in producing chickens.
===
B.
As a part of pattern of trade, Canland will specialize and produce Turkeys and export it to Autalia. Further, Autlalia will specialize and produce chicken and export it to Canland.
Price of trade will range from 1 turkey for 5 chickens to 1 turkey for 15 chickens.
===
C.
When price is 1 turkey for 10 chickens, then, with trade:
Autalia can get 2000 turkeys by selling 20000 chickens.
Canland will get 20000 chickens by selling 2000 turkeys to Autalia.
After trade:
Autalia has 2000 turkeys and (30000-20000 =) 10000 chickens
Canland has (10000-2000 =) 8000 turkeys and 20000 chickens.
It can be observed that after trade, both countries are in a better situation with more goods. So, they are better off after the trade.
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Refer to HW #7. Does either country have an absolute advantage
in the production of the two goods?
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