Suppose that Hopeland and Faithland have the output figures contained in the below table, shown in terms of productivity per worker.

AVERAGE PRODUCT PER WORKER

Country

Wheat

Wine

Hopeland

3 bushels

or

1 barrels

Faithland

1 bushel

or

2 barrels

a. Assume that the costs and productivity remain constant. What is the opportunity cost of producing wheat and wine in Hopeland and Faithland?

Instructions: Round your answers to 2 decimal places.

Hopeland

Faithland

1 wheat =

__________ wine

__________ wine

1 wine=

__________ wheat

__________ wheat

b. In which product does each country have a comparative advantage?

Hopeland:(wheat, wine)

Faithland:(wine, wheat)

c.Suppose that the labor force in Hopeland is 20 million and in Faithland 10 million. Show, in a table with five columns, the production possibilities of each country. (Suggestion: use 100% labor to produce wheat at 'A', and to produce wine at 'E'; and then split labor as 75:25, 50:50 and 25:75 for 'B', 'C' and 'D', respectively to produce both goods)

Instructions: Round your value to 1 decimal place.

Hopeland's Production Possibilities (in millions of units)

A

B

C

D

E

Wheat

__________

__________

__________

__________

__________

Wine

0

__________

__________

__________

__________

Faithland's Production Possibilities (in millions of units)

A

B

C

D

E

wheat

__________

__________

__________

__________

__________

wine

0

__________

__________

__________

__________

d.Assume that each country is now producing combination C. What are their present joint output totals?

Joint totals:__________ wheatand __________ wine.

e.Suppose that each country specializes in the product in which it has a comparative advantage. What will be the new output totals, and what will be the gains from trade?

Instructions: Round your gain valueto 1 decimal place.

New joint totals: __________ wheat (in Hopeland) and __________ wine (in Faithland)

Gains:__________ wheat and ______________ wine

f. Suppose that the two countries establish the terms of trade at 1 wine = 2 wheat, and Hopeland decides to trade 15 wheat to Faithland. What will be the consumption totals for the two countries?

Instructions: Round your valuesto 1 decimal place.

Hopeland: __________ wheat; __________ wine

Faithland: __________ wheat; __________ wine