Using a certain quantity of resources workers in the fictiti

Using a certain quantity of resources, workers in the fictitious country of Iguania can produce 4 bottles of penicillin or 12 loaves of bread. Using the same resources, workers in another fictitious country, Chamelia, can produce 6 bottles of penicillin or 8 loaves of bread.

A. Calculate the opportunity cost of producing each good in each country. (3 points)

B. Which country has comparative advantage in the production of which good? (3 points)

C. Complaints about \"unfair trade practices\" lead to a mutual embargo between these two countries. Who will gain and who will suffer because of this embargo? (3 points)

D. If, after a long embargo, trade is resumed between these two countries, who would benefit the most from it? (3 points)

Solution

A.

Inguania:

4 bottles of penicillin or 12 loaves of bread

Chamelia:

6 bottles of penicillin or 8 loaves of bread

In Inguania, the opportunity cost of getting 1 bottle of penicillin would cost 3 loaves of bread. Whereas to get a loaf of bread, one has to forgo only 2/3^rd bottle of penicillin.

In Chamelia, the opportunity cost of getting one bottle of penicillin would cost (4/3) 1.33 loaves of bread. Whereas to get a loaf of bread, one h as to forgo (3/4) 0.75 bottle of penicillin.

B.

Output

Inguania

Chamelia

Penicillin

4

6

Bread

12

8

Country Inguania is better in producing bread because it is relatively 1 ½ times better in producing bread. Country Chamelia is better in producing penicillin because it is 1 ½ times relatively better producing penicillin.

C. Because of the embargo, country Chamelia will be affected because its export market for penicillin would be severely affected. It will lose its comaparative advantage of producing more penicliin when compared to country Inguania.

d) If the embargo is lifted, certainly country Chamelia would be benefitted as penicillin is the most sought after drug for controlling diabetes which is prevalent throughout the work. It will regain its comaparative advantage. County Inguania has a lesser comparative advantage producing insulin. Bread is a common commodity that doesn\'t require to be exported.

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