The following table shows the hypothetical labor requirements per ton of wool and per hand-knotted rug, for

Question:

The following table shows the hypothetical labor requirements per ton of wool and per hand-knotted rug, for New Zealand and for India.

a. Which country has an absolute advantage in each product?
b. Calculate the opportunity cost in each country for each of the two products. Which country has a comparative advantage in each product?
c. If India produces one more rug and exports it to New Zealand, what is the lowest price (measured in tons of wool) that it would accept? What is the highest price that New Zealand would pay? Within what range will the equilibrium terms of tradelie?

Opportunity Cost
Opportunity cost is the profit lost when one alternative is selected over another. The Opportunity Cost refers to the expected returns from the second best alternative use of resources that are foregone due to the scarcity of resources such as land,...