Assume that there are two countries in the world, Brazil and India, and they can
ID: 1148888 • Letter: A
Question
Assume that there are two countries in the world, Brazil and India, and they can produce two goods, Coffee and Tea. The following table tells us the maximum amount that each country can produce if they only produce that good (they are the end points of the PPF Assume that each country has resources that are identical in production Coffee- Brazil India ea 200 250 1. If each country likes tea and coffee equally, and they do not trade, how much of eoch country? What is world output for each good? Coffee ea Brazil India World 2. Who has the absolute advantage in coffee production?[ 3. Who has the absolute advantage in tea production? A. Calculate Brazil's opportunity cost of producing coffee in terms of tea. Round to two decimal places. +1 coffee- gtea 5. Calculate Brazil's opportunity cost of producing tea in terms of coffee. +1 tea 6. Calculate India's opportunity cost of producing coffee in terms of tea. 1 coffeetea 7. Calculate India's opportunity cost of producing tea in terms of coffee coffee coffee +1 tea 8. Who has the absolute a tage in coffee production? 9. Who has the absolute advantage in tea production? 0. If the two countries decide to trade, fill in the production with trade table below World 11. What are the gains from trade? 2. What are the consumption levels after trade? Assume that the two countries split the gains from trade equallyExplanation / Answer
8) Brazil has absolute advantage in coffee production because brazil can produce more coffee than India if it employ all of its labor in coffee production.
9) India has absolute advantage in tea production because India can produce more tea than India if it employ all of its labor in tea production.
10) The opportunity cost of coffee for Brazil = 200/600 = 1/3.
For India = 250/500 = ½. Since the opportunity cost of coffee for brazil is less so Brazil will produce coffee and india tea.
Coffee
Tea
Brazil
600
0
India
0
250
World
600
250
*For solution to other parts please post as a separate question.
Coffee
Tea
Brazil
600
0
India
0
250
World
600
250