Home has 1200 units of labor available. It can produce two goods: indigo and tob

Question

Home has 1200 units of labor available. It can produce two goods: indigo and tobacco. The unit labor requirement of indigo is 3, while in t production the unit labor requirement is 2. obacco 1. What is Home's opportunity cost of producing indigo? 2. In the absence of trade, what would the price of Indigo in terms of tobacco be? Foreign is a neighboring country with 800 units of available labor. It's unit labor requirements for indigo and tobacco are, respectively, 5 and 1. 3. What is Foreign's maximum production of tobacco? 4. What is Foreign's opportunity cost of producing tobacco? 5. Which country has comparative advantage in which good, and why? 6. Graph the PPFs for Home and Foreign; label thoroughly. TOBACCO ????? Pa

Explanation / Answer

ans:

home-

total labor =1200

unit labor requirement for indigo = 3 labor =>1200/3 = 400 units of indigo if all labor is used to produce indigo

unit labor requiremnet for tobacco = 2 labor => 1200/2 =600 units of tobacco if all labor is used to produce tobacco

foreign -

total labor = 800

unit labor requirement for indigo = 5 labor =>800/5= 160 units of indigo if all labor is used to produce indigo

unit labor requiremnet for tobacco = 1 labor => 800/1 =800 units of tobacco if all labor is used to produce tobacco

ans1.

home opp. cost of producing indigo = 600units of tobacco/400 units of indigo = 1.5 units of tobacco

home opp. cost of producing tobacco = 400 units of indigo / 600 units of tobacco = 0.66 units of indigo

ans2.

in absence of trade price of indigo in terms of tobacco in home is nothing but the opp. cost of producing indigo in home i.e. 1.5 units of tobacco

ans3 .

foreign's max prodution of tobacco is when it uses all its labor of 800 to produce tobacco i.e. 800/ per unit requirement of labor for tobacco = 800 /1 = 800 units of tobacco

ans4. opp cost of producing tobacco by foreign = 160 units of indigo/ 800 units of tobacco = 0.2 units of indigo

opp. cost of producing indigo by foreign= 800 units of tobacco / 160 units of indigo =5 units of tobacco

ans 5. opp.cost of producing indigo : 5 units of tobacco by foreign and 1.5 units of tobacco by home

hence, home has a comparative adv. in producing indigo (as 1.5 < 5)

opp. cost of producing tobacco : 0.2 units of indigo in foreign and 0.66 units of indigo by home

hence, foreign has a comparative adv in producing tobacco (as 0.2 <0.66)

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