Y6

2. The nation of Middle-earth (M) has 1000 units of labor, each of which can produce either 2 books or 5 video games; the nation of Namia (N) has 500 units of labor, each of which can produce either 5 books or 5 video games. Assume that books and video games can be produced in fractional (not just integer) numbers. (a) Which country has the comparative advantage in each good? Briefly explain how you know. (b) Suppose that, with international trade, 2 video games can be traded for 1 book (Note that this can be considered the trade price). Draw carefully-labeled Production Possibility Curves for Middle-earth and for Narnia, both without and with international trade; use your diagrams to illustrate (and also explain in words) how both countries can benefit from trade. (c) For this part, ignore the international trade price of 2 video games for 1 book set in part (b). What is the range of prices such that these countries will be open to trade with one another? Will both countries be better off? (Note: define "price" as the number of video games it costs to purchase I book)