Home has 1200 hours of labor available It can produce two go

Home has 1,200 hours of labor available. It can produce two goods, coffee and chocolate. The unit labor requirement in coffee production is 2 hours, while in chocolate production it is 3 hours. Now there is another country, Foreign, with 800 labor hours available, Foreign\'s unit labor requirement in coffee production is 4 hours, and in chocolate production it is 1 hour. Graph Foreign\'s production possibility frontier. Which country (Home or Foreign) has an absolute advantage in coffee production? Construct the world relative supple curve. Make sure to label everything

Solution

(a) Production possibility frontier or production possibility curve shows combination of two goods which an economy can produce with its available resources. Production possibility curve is concave towards origin.

If x-axis of production possibility curve shows units of coffee produced and y-axis shows units of chocolates produced then it means that after employing all resources how much units of coffee and chocolates an economy can produce with its given resources.

Since, foreign country has total 800 hours and it is able to produce 1 unit of coffee in 4 hours by one labor and 1 unit of chocolate in 1 hour by one labor. So, it shows that foreign country can either produce 200 units of coffee or 800 units of chocolates with its available resources.

Therefore, x-axis of production possibility curve of foreign country touches 200 as total units of coffee that country is able to produce without producing chocolate. While, y-axis touches 800 as country can produce these units of chocolates without employing its resources in the production of coffee.

If foreign country distribute its hours equally in the production of coffee and chocolates then it can produce 100 units of coffee (i.e. 400 hours for producing coffee / 4 hours in production of one unit of coffee) and 400 units of chocolates (i.e. 400 hours for producing chocolates/ 1 hour in production of one unit of chocolate).

After combining all these combinations of coffee and chocolate production, we attain production possibility frontier.

(b) Absolute advantage is the ability of a country to produce the same good at a lower cost than the other countries. If there are two countries A and B in which Country A can produce one unit of wine in 4 hours by employing one labor and County B can produce same unit of wine in just 1 hour by employing a single labor. Then it shows that Country B has an absolute advantage in the production of wine as compared to Country A.

Similarly, in the question home country is able to produce one unit of coffee in 2 hours by employing one unit of labor while foreign country can produce it in 4 hours.

Therefore, Home country has an absolute advantage in the production of coffee as compared to foreign country.