Answer to Question #200662 in Economics of Enterprise for Nawodya Ranasinghe

Question

1.   The countries France and Italy produce Perfumes and Leather Coats using only labor as an input. AvailableLabor for France and Italy is 3000 and 1000 respectively. Unit of labor per Leather Coat in France is 6 units and inItaly are 2 units. France needs 2 units of labors to produce 1 bottle of Perfume and Italy needs 4 unit of labor.

a)  Draw the Production Possibility Curve by using relevant information. (1*2=2 marks)

b)  Which country has the comparative advantage in producing Perfume? (3 marks)

Answer 1

(a)

we are given that

For France: 1 unit of leather cost requires 6 units of labor and

1 unit of perfume requires 2 units of labor.

therefore $6d+2p\leqq 3000$

whereby 3000 is the maximum amount of labor.

for Italy: $2d+4p\leqq1000$

(b) opportunity cost of perfume in France$=\frac{1}{3}$ leather coats

opportunity cost of perfume in Italy$=2$ leather coats

France has comparative advantage in perfumes since the opportunity cost is less than the opportunity cost in Italy.