httpsmyuneeduauereserverbiblioID85374 laxvideos 110 5 of 5

?? https://my.une.edu.au/ereserverbiblioID-85374 laxvideos 110% 5 of 5 -+ Automatic Zoom b. Demonstrate that the utility possibilities frontier can never be upward sloping. c. Cuba and Mexico can produce the amounts of rum and tequila indicated in the table below with one unit of land. Each country has 10 units of land. i. Does either country have an absolute advantage? i. Which country has a comparative advantage in rum production and which in tequila ii. Is it possible for the two countries to benefit from trade? production? Country Mexico Cuba Rum Tequila 10

Solution

b) utility possibilities frontier is similar to production possibility frontier . It represents the combinations of maximum attainable utility of an individual . On the two ends of axes the minimum and maximum utilityy of the two individuals is represented . UPF curve can be concave or convex but has to be downward sloping .

The slope represents that the gain of one agent is the loss of other agent since we have fixed number of goods or resources .

so the slope of UPS will be negative to the ratio of marginla utilities of the consumers so we have negative slope and hence downward sloping curve . In case of upward sloping both the agents will gain as the curve goes upwards which is not possible since the resources are given

c) i) Both countries have absolute advantage . CUba has it in production of rum while Mexico in production of tequila

ii) for comparative advantage we look at who has the least opportunity cost in production of the good . so for Mexico we have opportunity cost as for 2 unit of rum = 4 units of tequila

so 1 unit of rum = 2 units of tequila

for cuba

10 units of rum = 1 unit of tequila

so 1 unit of rum = 1/10 unit of tequila (0.1)

so mexico has low opportunity cost in case of tequila as for production of tequila Mexico will forgo only 0.5 units of rum but Cuba will forgo 10 units

so Mexico has comparative advantage in its production with least opportuinity cost

Cuba will have comparative advantage in production of rum as the units forgo is 1/10 as compared to 2 in case of Mexico . so Cuba has the comparative advantage in case of rum

iii) Yes , it is possible for both countriesd to benefit from trade, If Cuba specializes in production of rum and Mexico in production of tequila and then trade both of them will benefit due to efficiency and trade .