Two countries, Malta (M) and Netherlands (N), can each produce only two products, avocados (A) and bananas (B). Production Possibilities curves for M and N are given by the following equations:

for Malta: A+2B=2000

for Netherlands: 4A+B=1600

Countries can freely trade with each other.

1) Which country has comparative advantage in production of avocados (Malta, Netherlands, both or neither)?

2) What is the opportunity cost of producing 1 ton of avocados in Netherlands?

3) If the price of avocados is $20/ton, what is the maximum possible equilibrium price of bananas?

4) What is the price of bananas if the price of avocados is $20/ton and Malta is the only country that benefits from trade?

5) Find the world production of bananas if Malta produces 500 tons of avocados?

6) How many tons of bananas are produced in Netherlands if the world production of avocados is 700 tons

7) What can you say about the world production of avocados if only Netherlands benefits from trade?

8) Which country benefits from trade (Malta, Netherlands, both or neither) if the price of bananas is $4/ton and the price of avocados is $16/ton.

9) Assume that the price of bananas is $10/ton and the price of avocados is $5/ton. What will happen (increase, decrease, stay the same) to the world production of bananas if the price of avocados increases to $10? Explain!

10) Assume that the price of bananas is $5/ton and the price of avocados is $20/ton. Assume also that people in both countries consume avocados and bananas in the same fixed proportion. Which country will end up selling avocados?