(Get Answer)
Expert Answer
Question
Let two countries, A and B, produce two goods, good I and good II. The two countries produce goods I and II at the following labor costs (in man-hours):
| Good I | Good 2 | |
| Country A | aLIA = 1 | aLIIA = 2 |
| Country B | aLIB = 4 | aLIIB = 3 |
ORDER YOUR PAPER NOW
Step-by-step
Step 1/4
To determine the comparative advantage of each country, we need to compare their relative opportunity costs of producing each good. Opportunity cost refers to the cost of producing one unit of a good in terms of the foregone production of another good.
- Explanation for step 1
For country A, the opportunity cost of producing one unit of good I is the number of man-hours required to produce one unit of good II divided by the number of man-hours required to produce one unit of good I, which is: Opportunity cost of producing good I in country A = aLIIA/aLIÀ = 2/1 = 2 Similarly, the opportunity cost of producing one unit of good II in country A is: Opportunity cost of producing good II in country A = aLIÀ/aLIIA = 1/2 = 0.5 For country B, the opportunity cost of producing one unit of good I is: Opportunity cost of producing good I in country B = aLIIB/aLIB = 3/4 = 0.75 The opportunity cost of producing one unit of good II in country B is: Opportunity cost of producing good II in country B = aLIB/aLIIB = 4/3 = 1.33 Comparing the opportunity costs, we can see that for country A, the opportunity cost of producing good I is lower than that of producing good II. This means that country A has a comparative advantage in producing good I. For country B, the opportunity cost of producing good II is higher than that of producing good I, which means that country B has a comparative advantage in producing good I. Therefore, country A has a comparative advantage in producing good I, and country B has a comparative advantage in producing good II. Opportunity Cost Of Producing Good Assignment Paper
Step 2/4
To construct the production possibilities curves (PPCs) for both countries, we need to plot the various combinations of goods I and II that each country can produce given its available labor resources and the labor costs of each good.
To do this, we will assume that the opportunity cost of producing each good is constant in both countries. This means that as a country increases its production of one good, it will have to give up an increasing amount of the other good. In other words, the tradeoff between the two goods is linear and constant.
Note that in both countries, the PPCs are downward sloping straight lines, reflecting the constant opportunity cost assumption. The slope of each PPC represents the opportunity cost of producing one good in terms of the other good. In Country A, the opportunity cost of producing one unit of Good I is 2 units of Good II (i.e., the slope of the PPC is -2). In Country B, the opportunity cost of producing one unit of Good I is 3.375 units of Good II (i.e., the slope of the PPC is -3.375)Opportunity Cost Of Producing Good Assignment Paper.
- Explanation for step 2
To construct the PPC for Country A, we can follow these steps: On a graph, plot the axis for Good I on the x-axis and the axis for Good II on the y-axis. Determine the maximum amount of Good I that Country A can produce, given its available labor resources. In this case, Country A has 100 labor units, and producing one unit of Good I requires 1 labor unit, so the maximum amount of Good I that Country A can produce is 100. Determine the maximum amount of Good II that Country A can produce, given its available labor resources. In this case, producing one unit of Good II requires 2 labor units, so the maximum amount of Good II that Country A can produce is 50 (i.e., 100/2). Plot the point (100, 0) on the graph, which represents the maximum amount of Good I that Country A can produce (with all its labor resources) and 0 amount of Good II. Plot the point (0, 50) on the graph, which represents the maximum amount of Good II that Country A can produce (with all its labor resources) and 0 amount of Good I. Connect the two points with a straight line to form the PPC for Country A. To construct the PPC for Country B, we can follow similar steps: On a graph, plot the axis for Good I on the x-axis and the axis for Good II on the y-axis. Determine the maximum amount of Good I that Country B can produce, given its available labor resources. In this case, Country B has 321 labor units, and producing one unit of Good I requires 4 labor units, so the maximum amount of Good I that Country B can produce is 80 (i.e., 321/4). Determine the maximum amount of Good II that Country B can produce, given its available labor resources. In this case, producing one unit of Good II requires 3 labor units, so the maximum amount of Good II that Country B can produce is 107 (i.e., 321/3). Plot the point (80, 0) on the graph, which represents the maximum amount of Good I that Country B can produce (with all its labor resources) and 0 amount of Good II. Plot the point (0, 107) on the graph, which represents the maximum amount of Good II that Country B can produce (with all its labor resources) and 0 amount of Good I. Connect the two points with a straight line to form the PPC for Country B. Opportunity Cost Of Producing Good Assignment Paper
Step 3/4
To find the range of prices between which the two countries show profits after the commencement of trade between them, we need to compare their relative costs of producing each good and determine which country has a comparative advantage in producing each good. The relative cost of producing a good is measured by the opportunity cost of producing that good, which is the amount of the other good that could have been produced with the same amount of resources (labor units in this case).
Therefore, the range of prices between which the two countries show profits after the commencement of trade between them is: 0.5 < P/Q < 0.75 Within this range, both countries can gain from trade by specializing in the production of the good in which they have a comparative advantage and trading for the other good.
- Explanation for step 3
For Country A: The opportunity cost of producing one unit of good I is 2/1 = 2 units of good II. The opportunity cost of producing one unit of good II is 1/2 = 0.5 units of good I. For Country B: The opportunity cost of producing one unit of good I is 3/4 = 0.75 units of good II. The opportunity cost of producing one unit of good II is 4/3 = 1.33 units of good I. From the above, we can see that Country A has a comparative advantage in producing good I (lower opportunity cost), while Country B has a comparative advantage in producing good II (lower opportunity cost). To determine the range of prices between which the two countries show profits, we need to consider the terms of trade, which is the exchange ratio of the two goods in international trade. The terms of trade must lie between the opportunity cost ratios of the two countries. Suppose the price of good I is P and the price of good II is Q. Then the terms of trade can be expressed as P/Q. For Country A, the minimum price ratio that would make it profitable to trade is 0.5 (the opportunity cost of producing good II). If the terms of trade are more favorable (i.e., P/Q > 0.5), then Country A would specialize in producing good I and export it in exchange for importing good II. For Country B, the minimum price ratio that would make it profitable to trade is 0.75 (the opportunity cost of producing good I). If the terms of trade are more favorable (i.e., P/Q < 0.75), then Country B would specialize in producing good II and export it in exchange for importing good I. Opportunity Cost Of Producing Good Assignment Paper
Step 4/4
To find the distribution of gains from trade between the two countries, we need to compare their relative production efficiencies in the two goods and determine the terms of trade (the price ratio of the two goods) that will allow both countries to gain from trade.
First, let's calculate the labor productivity of each country in each good. This is done by dividing the quantity of each good that can be produced with one hour of labor, i.e., Good 1 output per hour of labor and Good 2 output per hour of labor:
- Explanation for step 4
Country A: Labor productivity of Good 1 = 1/aLIA = 1/1 = 1 unit/hour Labor productivity of Good 2 = 1/aLIIA = 1/2 = 0.5 unit/hour Country B: Labor productivity of Good 1 = 1/aLIB = 1/4 = 0.25 unit/hour Labor productivity of Good 2 = 1/aLIIB = 1/3 = 0.33 unit/hour Next, let's construct the production possibility frontiers (PPFs) for each country, which show the maximum amounts of each good that can be produced given their resources and technology. The PPF for Country A is shown in the following graph, where the slope of the curve at any point represents the opportunity cost of producing one good in terms of the other good: Opportunity Cost Of Producing Good Assignment Paper
| / 50 | / PPF_A | / 25 | / |/ /--------- 100 25 50
| / 80| / PPF_B | / 40| / /--------- 321 80 160
We can see that Country A has an absolute advantage in producing both goods since it has a lower labor cost for each good. However, it has a comparative advantage in producing Good 1 since it has a lower opportunity cost (1/2 unit of Good 2 foregone for each unit of Good 1 produced), while Country B has a comparative advantage in producing Good 2 (3/4 unit of Good 1 foregone for each unit of Good 2 produced). To determine the terms of trade that will allow both countries to gain from trade, we need to find the price ratio of the two goods that lies between the opportunity costs of the two countries. That is, the terms of trade should be such that Country A can trade Good 1 for more than 1/2 unit of Good 2 (its opportunity cost of producing Good 1) and Country B can trade Good 2 for more than 3/4 unit of Good 1 (its opportunity cost of producing Good 2). One such price ratio that satisfies this condition is P I / PII = 1/2.
ORDER YOUR PAPER NOW
Final answer
Assuming that before trade, each country consumes what it produces, the initial consumption bundle of Country A is (50, 25) (50 units of Good 1 and 25 units of Good 2), and that of Country B is (40, 80) (40 units of Good 1 and 80 units of Good 2). If the terms of trade are P I / PII = 1/2, then Country A will want to trade some of its Good 1 for Good 2, while Country B will want to trade some of its Good 2 for Good 1.
Suppose that after trade, Country A and Country B agree to trade 20 units of Good 1 for 20 units.
You can find conclusion of each point in their respective step Opportunity Cost Of Producing Good Assignment Paper
This question has already been tackled by one of our writers and a good grade recorded. You can equally get high grades by simply making your order for this or any other school assignment that you may have.
Every Student Buys Essays from us, here is why!
Pressed for time to complete assignments or when you feel like you cannot write, you can purchase an essay on our website. Some students also want model papers to use as samples when revising or writing. There are also students who approach our essay writing service to beat deadlines. We handle every type of homework, assignment, and academic writing tasks. You can buy college essays and other assignments here. At a glance, here are some reasons students prefer our website.
100% Original Essays and Papers
You can be sure that you are getting a paper that is custom written based on your instructions. We do not sell papers that are pre-written. Instead, we write every essay from scratch. When you say “write my essay,” we respond by giving you a paper that is 100% original and free of any plagiarism. The essays you purchase from us have never been sold anywhere.
Flexible & Affordable Prices
It does not cost a fortune to get academic writing help on our website. If you have a question from class, place an order, get a discount, and get cheap essay writing services. What you see as the price is what you pay for. There are no any hidden charges. If you need urgent papers, they might cost a little more, but the price is worth the quality you get in the end. Hire a professional academic writer beginning from $13 a page.
Anonymity, Privacy, and Confidentiality
No one will ever know that you purchased an essay or assignment from our website. The essays you buy from us are written by experts. Your data is only used to coordinate the essay writing services you get. No one can access your personal information and data. Go ahead and order an essay from our website. It is safe, secure, and convenient.