1 Suppose that Britain and Portugal produce two goods wine a

1. Suppose that Britain and Portugal produce two goods, wine and cloth using labor as the only factor in production. England is endowed with 200 workers and Portugal is endowed with 100 workers. The productivity per worker schedule is given for both countries on the following table. Answer the following questions. Wine (bottle per worker) Cloth (piece per worker) Britain Portugal a. What is the maximum number of cloth Britain and Portugal (separately) can produce? b. What is the maximum amount of wine Britain and Portugal (separately) can produce? c. Plot the production possibilities frontier of both countries on separate graphs. (You may put d. e. f. wine on the y-axis and cloth on the x-axis.) Which country has absolute advantage in wine and cloth respectively? Explain. Find the opportunity costs of Britain and Portugal in wine and cloth production. According to the opportunity costs you have calculated, which country has comparative advantage in wine and cloth production?

Solution

1) Britain can produce 600 piece of cloth and portugal can produce 400 piece of cloth.

B)Britain can produce 1000 bottle of wine and portugal can produce 400 wine.

D) An economy has absolute advantage in a good in which he has more efficiency.Portugal has absolute advabtage in both goods.

E)opportunity cost of wine=1.5cloth in Britain and opportunity cost of cloth=0.66wine in Briatain

Similarly opp cost of wine=0.8cloth and opp cost of cloth=1.25 wine in portugal.

F)briatain has Comp. Advantage in wine and portugal has CA in cloth.