Country A has 3500 units of labor and can produce two goods, manufactures and fo
ID: 1224737 • Letter: C
Question
Country A has 3500 units of labor and can produce two goods, manufactures and food. A’s producers take 7 units of labor to produce one unit of manufactures and 2 units to produce one food unit. Country B has 4500 units of labor and takes 5 units of labor to produce one unit of manufactures and 10 units to produce one unit of food. At what price of food in terms of manufactures would A and B respectively supply food? Would trade take place in between A and B in Adam Smith’s world? How many food units could B supply?
Explanation / Answer
Country A has 3500 units of labor
A’s producers take 7 units of labor to produce one unit of manufactures and 2 units to produce one food unit. >> 7m+2f=3500
Country B has 4500 units of labor
It takes 5 units of labor to produce one unit of manufactures and 10 units to produce one unit of food>> 5m+10f=4500
Price of food in A=7/2=3.5manufactures
Price of food in B=5/10=0.5manufactures
Yes trade would take place between A and B. B would specialize in food and A would specialize in manufactures.
B would supply 4500/10=450 units of food
A would supply 3500/7=500 units of manufactures