1.2.1 Suppose Latvia and Estonia each produce only two goods, tractors and bobsleds. Both are produced using labor alone. Assuming both countries are at full employment, you are given the following information:

Latvia: 12 units of labor required to produce 1 tractor 4 units of labor required to produce 1 bobsled Total labor force: 900,000 units Estonia: 16 units of labor required to produce 1 tractor 8 units of labor required to produce 1 bobsled Total labor force: 600,000 units

a. Draw the production possibility frontiers for each country in the absence of trade.

b. If transportation costs are ignored and trade is allowed, will Latvia and Estonia engage in trade? Explain.

c. If a trade agreement is negotiated, at what rate (number of tractors per bobsled) would they agree to exchange?