Suppose that in the United States a car can be produced with 200 labor hours, while a ton of rice requires 20 labor hours. In Japan, it takes 150 labor hours to make a car and 50 labor hours to grow a ton of rice. What is the opportunity cost of producing rice in each country, stated in terms of cars? What is the opportunity cost of cars, stated in terms of rice? Which country has a comparative advantage in cars? Which in rice?
Suppose that in the United States a car can be produced with 200 labor hours, while a ton of rice requires 20 labor hours. In Japan, it takes 150 labor hours to make a car and 50 labor hours to grow a ton of rice. What is the opportunity cost of producing rice in each country, stated in terms of cars? What is the opportunity cost of cars, stated in terms of rice? Which country has a comparative advantage in cars? Which in rice?
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You are given the information shown in the table about production relationship in Pugelovia and Pomerania below:
| Labor Hours Per Unit of Rice | Labor Hours Per Unit of Cloth | |
| Pugelovia | 75 | 100 |
| Pomerania | 50 | 50 |
You make several Ricardian assumptions: these are the only two commodities, the productivity of labor is constant for each product no matter how much is produced, and competition prevails in all markets.
1)Compute the productivity of each country for each product. Which country has an absolute advantage at producing rice? Which country has an absolute advantage at producing cloth?
2)Compute the relative prices of each product in each country without trade. Which country has a comparative advantage at producing rice? Which country has a comparative advantage at producing cloth?
3)According to the theory of comparative advantage, which country would export rice? Which country would export cloth?
4)If Pugelovia and Pomerania are allowed to trade, what would be the limits for the relative price of rice? What would be the limit for the relative price of cloth?
5)Assume that no trade is allowed between the countries and that Pugelovia has 10,000 hours of labor available to use. If people want to consume rice and cloth in equal amounts, how much rice and how much cloth would Pugelovia produce?
6)Plot the production possibility curve for Pugelovia if it has 10,000 hours of labor available. Label the economyâs production of rice and cloth from part e point A on the PPC.
