Assume Saudi Arabia and the United States face the production possibilities for oil and cars shown in
Question:
Assume Saudi Arabia and the United States face the production possibilities for oil and cars shown in the accompanying table.
a. What is the opportunity cost of producing a car in Saudi Arabia? In the United States? What is the opportunity cost of producing a barrel of oil in Saudi Arabia? In the United States?
b. Which country has the comparative advantage in producing oil? In producing cars?
c. Suppose that in autarky, Saudi Arabia produces 200 million barrels of oil and 3 million cars; and suppose that the United States produces 300 million barrels of oil and 2.5 million cars. Without trade, can Saudi Arabia produce more oil and more cars? Without trade, can the United States produce more oil and more cars?
Suppose now that each country specializes in the good in which it has the comparative advantage, and the two countries trade. Also assume that for each country the value of imports must equal the value of exports.
d. What is the total quantity of oil produced? What is the total quantity of cars produced?
e. Is it possible for Saudi Arabia to consume 400 million barrels of oil and 5 million cars and for the United States to consume 400 million barrels of oil and 5 million cars?
f. Suppose that, in fact, Saudi Arabia consumes 300 million barrels of oil and 4 million cars and the United States consumes 500 million barrels of oil and 6 million cars. How many barrels of oil does the United States import? How many cars does the United States export? Suppose a car costs $10,000 on the world market. How much, then, does a barrel of oil cost on the world market?
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