Suppose that country A and country B both produce wine and cheese. Country A has 800 units of available labor, while country B has 600 units. Prior to trade, country A consumes 40 pounds of cheese and 8 bottles of wine, and country B consumes 30 pounds of cheese and 10 bottles of wine.

Country A Country B

Labor per pound cheese 10 10

Labor per bottle wine 50 30

a. Which country has a comparative advantage in the production of each good? Explain.

b. Determine the production possibilities curve for each country, both graphically and

algebraically. (Label the pretrade production point PT and the post-trade point P.)

c. Given that 36 pounds of cheese and 9 bottles of wine are traded, label the post-trade

consumption point C.

d. Prove that both countries have gained from trade.

e. What is the slope of the price line at which trade occurs?