The Crazies

Problem 3.8. Vintland and Moonited Republic
Table of Activity Requirements:
Wine
Cheese
Vintland
15
10
M.Rep.
10
4
a. Moonited Republic has an absolute receipts in both goods -- it can ready both wine and cheese with lower
undertaking inputs.
b. Opportunity personify calculations:
In Vintland: To produce an extra nursing bottle of wine, you need 15 hours of labor. This means taking 15 hours of labor
away from cheese, and since 10 hours is needed for each kg of cheese, this means giving up 1.5 kilos of cheese.
Hence in Vintland the OC of a bottle of wine is 1.5 kilograms of cheese.
In Moonited Republic, to produce 1 bottle of wine you need 10 hours of labor, and to get the 10 hours of labor by
transferring workers from the cheese industry, you must give up 2.5 kilos of cheese.
In Moonited Republic, the OC of a bottle of wine is 2.5 kilograms of cheese.
Hence, Vintland is the low opportunity cost maker of wine and has the comparative advantage in cheese.
Calculate the OC of producing another(prenominal) kilo of cheese: you will find it as 2/3 of a bottle of wine in Vintland, and as
four-tenths of a bottle of wine in MR. Since 0.67 > 0.4, Vintland is the high opportunity cost producer of cheese, and
MR has the comparative advantage in cheese.
c.



PPFs: Write the drudgery functions for Vintland:
Wine = 1/15 Labor. If all 30 cardinal workers in Vintland were in Wine, Wine production would be 2 million.
Cheese = 1/10 Labor. If all 30 million workers in Vintland were in Cheese, Cheese production wourl be 3 million.
In MR, the production functions are Wine = 1/10 Labor, for a maximum of 2 million (the same as Vintland)
and Cheese = 1/4 Labor, so that maximum production = 1/4 (20 million) or 5 million.
d. Autarky cost ratios:
Suppose Vintland wages are $ 2, so that Pw = $ 30 and Pc = $ 20. Pw / Pc = 1.5
Suppose MR wages are € 5, so that Pw = € 50 and Pc = € 20. Pw / Pc = 2.5
The text assumes that Pw / Pc = 2.0 [wine is twice as expensive as cheese]
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