2. (10 marks) The countries of East Wakovia and West Wakovia have the production

Question

2. (10 marks) The countries of East Wakovia and West Wakovia have the production possibilities tables for tobacco and corn shown below. Note that the costs of producing tobacco and corn are constant in both countries Product Iternative Tobacco 20 16 12 8 121620 West Wakovia's Production Possibilities Table Product Tobacco 15 12 0510 15 2 25 (a) In East Wakovia, the opportunity cost of producing: 4 units of tobacco is 1 unit of tobacco is com units. corm units. (b) In West Wakovia, the opportunity cost of producing: 3 units of tobacco is_ corn units 1 unit of tobacco is-corn Which country has the comparative advantage in corn production and which country has the comparative advantage in tobacco production? (c) (d) If each nation specializes in the product where it has a comparative advantage and trades with the other, what will be the limits to the terms of trade for each tobacco unit? (e) If East Wakovia is currently producing at combination D on its own PPC, and West Wakovia is at combination C on its own PPC, what would be gains from specialization and trade? () Assume the terms of trade is Itobacco-1.5 corn. Draw the production possibility curves (PPC) for East Wakovia and West Wakovia with and without an international trade.

Explanation / Answer

2)a. In East wakovia, the opportunity cost of producing: 4 units of tobacco is 4 units of corn units. 1 unit of tobacco is 1 corn unit.

b) In west wakovia, the opportunity cost of producing: 3 units of tobacco is 5 corn units , 1 unit of tobacco is 5/3 = 1.66 corn units.

West wakovia has comparative advantage in corn production because to produce 1 unit of extra there will be less amount of tobacco sacrifice (0.6) compare to east wakovia(1) and East wakovia has comparative advantage in tobacco production because 1<1.66.

d) If each nation specialises in the production where it has comparative advantage then the limits to the terms of trade for each tobacco unit is 1.25 corn.

e)

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