Consider the hypothetical total outputs of two countries, Amazonia and Bretonia, for two products, coffee and tea. The countries are using the same quantities of resources for production.

1. Calculate the opportunity costs of producing tea and coffee:

a) in Amazonia

b) in Bretonia Let us assume that the two countries will exchange tea and coffee in the ratio of 1:1, ie 1 kilo of coffee for 1 kilo of tea.

2. Draw a PPC diagram for Amazonia including a 1:1 exchange ratio line.

a) Show the original position on the PPC if Amazonia was producing and consuming 100 million kilos of coffee and 200 million kilos of tea.

b) Show on the diagram, and explain in writing, what will happen if Amazonia specializes in coffee production, consumes 200 million kilos of coffee, and exports the remainder to Bretonia in exchange for tea, at an exchange ratio of 1:1.

3. Draw a PPC diagram for Bretonia including a 1:1 exchange ratio line.

a) Show the original position on the PPC if Bretonia was producing and consuming 200 million kilos of coffee and 800 million kilos of tea.

b) Show on the diagram, and explain in writing, what will happen if Bretonia specializes in tea production, consumes 900 million kilos of tea, and exports the remainder to Bretonia in exchange for coffee, at an exchange ratio of 1:1.

Transcribed Image Text:

Amazonia Coffee (kilos million) 500 400 300 200 100 0 Tea (kilos million)] 0 50 100 150 200 250 Bretonia Coffee (kilos million) 600 500 400 300 200 100 0 Tea (kilos million) 0 200 400 600 800 1,000 1,200