Answer to Question #211984 in Finance for simanta

Question

Consider a world consisting of two countries, Iceland and Finland. Finland has L=300

units of labor and Iceland has L*=100 units of labor, the only input.

There are two goods – fish (F) and video games (V).

In Finland: MPLF =1/2 and MPLV =1/4, in Iceland: MPL*

F =1/2 and MPL*

V =1/2.

(a) Which country has an absolute advantage in which good(s)?

(b) What is the opportunity cost of producing fish in Finland (Iceland)? What is the

opportunity cost of producing video games in Finland (Iceland)?

(c) Which country has a comparative advantage in which good?

(d) Draw the production possibilities frontier for each country. What are the

production opportunity and autarky consumption opportunity sets in each country?

(e) Draw the relative supply of fish (F/V) curve for each country.

(f) Assume that each country has the same downward-sloping relative demand for fish

curve. What is the autarky equilibrium relative price of fish in each country?

Answer 1

(a) Iceland has an absolute advantage in production of video games.

(b) The opportunity cost of producing fish in Finland is 0.5 video game and in Iceland is 1 video game.

The opportunity cost of producing video games in Finland is 2 units of fish, and in Iceland is 1 unit of fish.

(c) Finland has a comparative advantage in fish.

(d) The production possibilities frontier for each country will show possible outputs of fish and video games. The PPF of Iceland will be to the right of PPF of Finland.

The autarky consumption in Finland can be 50 units of fish and 50 units of video games.

The autarky consumption in Iceland can be 25 units of fish and 25 units of video games.

(e) The relative supply of fish (F/V) curve for Finland country will be steeper.

(f) The autarky equilibrium relative price of fish in each country will be different.