Assume: 1) only two commodities are produced; 2) there are constant ratios of input to output whatever the level of output of coffee and bananas; and 3) competition prevails in all markets.

Labor hours per keg of coffee Labor hours per kilogram of bananas

Peruvia 12 15

Zululand 6 5

1. Which nation has an absolute advantage in coffee production?

2. Which nation has an absolute advantage in bananas production?

3. Peruvia's opportunity cost to produce an additional keg of coffee is _________ kilos of bananas.

4. Peruvia's opportunity cost to produce an additional kilo of bananas is _________ kegs of coffee.

5. Zululand's opportunity cost to produce an additional keg of coffee is _________ kilos of bananas.

6. Zululand's opportunity cost to produce an additional kilo of bananas is _________kegs of coffee.

7. Which nation has a comparative advantage in coffee production?

8. Which nation has a comparative advantage in banana production?

9.Describe the adjustment process in Peruvia and Zululand as free trade opens between them.

10. Which country exports/imports which product? Explain briefly.