Suppose in Country A a worker can produce either 16 units of cloth or 2 bicycles while in Country B a worker can produce either 20 units of cloth or 5 bicycles.

1. Which country has a comparative advantage in cloth production? In bicycle production? (2 marks)
2. Suppose each country has 1,000 workers. Currently, each country devotes 40 percent of its labor force to cloth production and 60 percent to bicycle production. What is the output of cloth and bicycles for each country and what is the total output of cloth and bicycles between the two countries? (2 marks)
3. Suppose each country specializes in the production of the good in which it has a comparative advantage. What is the total output of cloth and bicycles in the two countries? (3 marks)
4. Provide a numerical example to show how Country A and Country B can both gain from trade. Assume that the terms of trade are established at 6 units of cloth for 1 bicycle. (3 marks)