Two countries FIN and RUS produce vodka V and caviar C using

Two countries, FIN and RUS, produce vodka (V) and caviar (C) using only labour. The unit labour requirements for the two goods and the two countries are:

Which of the following is TRUE?

1) The autarky relative price of vodka equals 0.5 units of caviar in FIN.

2) The autarky relative price of vodka equals 0.8 units of caviar in FIN.

3) The autarky relative price of vodka equals 1.6 units of caviar in FIN.

4) The autarky relative price of vodka equals 2 units of caviar in FIN.

Solution

ption 1 is correct.

In autarky, relative prices are equal to the opportunity cost of production. This is because, if a positive amount of both goods are demanded, in equilibrium, the cost of purchasing a good must equal the cost to produce the good.

so 8/16=.5