1. Imagine that two countries, Richland and Poorland can produce just two goods, computers and coal. Assume that for a given amount of land and capital, the output of these two products requires the following constant amounts of labour:
Richland Poorland
1 computer 2 4
100 tonnes of coal 4 5
Assume that each country has 20 million workers.
(a) Draw the production possibility curves for the two countries (on two separate diagrams).
(b) What is the opportunity cost of a computer in (i) Richland; (ii) Poorland?
(c) What is the opportunity cost of 100 tonnes of coal in (i) Richland; (ii) Poorland?
(d) Which country has a comparative advantage in which product?
(e) Assuming that price equals marginal cost, which of the following would represent possible exchange ratios? (i) 1 computer for 40 tonnes of coal; (ii) 2 computers for 140 tonnes of coal; (iii) 1 computer for 100 tonnes of coal; (iv) 1 computer for 60 tonnes of coal; (v) 4 computers for 360 tonnes of coal.
(f) Assume that trade now takes place and that 1 computer exchanges for 65 tonnes of coal. Both countries specialise completely in the product in which they have a comparative advantage. How much does each country produce of its respective product?
(g) The country producing computers sells 6 million domestically. How many does it export to the other country?
(h) How much coal does the other country consume?