Consider the following table of countries and their associated maximum production possibilities for wheat and wool below.
Question:
Consider the following table of countries and their associated maximum production possibilities for wheat and wool below. Note that these numbers represent tonnes of output per day.
| Country | Wheat | Wool |
|---|---|---|
| Finland | 20 | 15 |
| Iceland | 5 | 10 |
Based on the data in the table above, answer the following questions.
who should specialise in the production of wheat, as they have comparative advantage in producing wheat.
who should specialise in the production of wool, as they have comparative advantage in producing wool.
Suppose that a proposal is made from one of the countries that three tonnes of wool would be exchanged for three tonnes of wheat. The response to this proposal will be
1. rejection, as while Iceland will gain, Finland will lose from this exchange
2. rejection, as while Finland will gain, Iceland will lose from this exchange
3. rejection, as both countries will lose from this exchange
4. acceptance, as both countries will gain from this exchange.
Expert Answer:
