11. (LO 2, 3, 4) Latalia has a labour force of 12 million, half in the wool industry and half in rice farming. The labour productivity in the wool industry is 40 kilos per worker per year, and in rice farming it is 100 kilos per worker per year. Latalia has discovered that the international terms of trade are two kilos of rice per one kilo of wool.

It is happy with its current consumption of rice but would like to obtain more wool.

a) Assuming constant per-unit costs, on the graph in Figure 10.16 draw the production and trading possibilities curves for Latalia.

b) If Latalia were to specialize and trade, what product should it produce?

c) What would be Latalia’s gain from trade?

d) On the graph, indicate the consumption levels before and after trade.