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Assume the following:
• Brad and Jenny both produce food and dishes;
• Constant opportunity costs;
• Brad can produce 100 tonnes of food or 100 tonnes of dishes;
• Jenny can produce 400 tonnes of food or 200 tonnes of dishes;
• In autarky (i.e. self-sufficiency without trade) each person produces both goods and the optimal mix before the trade for Brad is (80) tonnes of food and (20) tonnes of dishes. For Jenny, the optimal mix before the trade is (300) tonnes of food and (50) tonnes of dishes.
a) What is the opportunity cost of 1 tonne of food for Brad? What is the opportunity cost of 1 tonne of dishes for Brad? What is the opportunity cost of 1 tonne of food for Jenny? What is the opportunity cost of 1 tonne of dishes for Jenny?
b) Which person has a comparative advantage in food and which person has a comparative advantage in dishes?
c) What are the minimum terms of trade that each person would be willing to accept in order to trade?
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Since all taxation transfers income from the population to the state, it does not matter very much if this transfer is through direct taxes on incomes or indirectly buy taxes on various goods and services.Discuss
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