QUESTION ONE. (30 Marks)

The maximum amount of Copper or Cars that Japan and Zambia can produce if they fully use all the factors of production at their disposal with the best technology available to them is shown (hypothetically) in Table 1

TABLE 1: COPPER AND CAR PRODUCTION

	Japan	Zambia
Copper(Tons)	500	1200
Cars	1500	800

(A)Assume that production occurs under constant-cost conditions.

Using graph paper, draw the production possibilities schedules for Japan and Zambia; locate Cars on the horizontal axis and Copper on the vertical axis of each country's graph.

In the absence of trade, assume that Japan produces and consumes 600 tons of Copper and 300 Cars and that Zambia produces and consumes 400 tons of Copper and 600 tons of Cars. Denote these autarky points on each nation's production possibilities schedule. [10 Marks]

(B) (I). Determine the MRT of Cars into Copper for each nation. [2 Marks]

(II). According to the principle of comparative advantage, should the two nations specialize? [2 Marks]

(III). If so, which product should each country produce? [2 Marks]

(IV). Will the extent of specialization be complete or partial? [2 Marks]

(V). Denote each nation's specialization point on its production possibilities schedule. [2 Marks]

(VI). Compared to the output of Cars and Copper that occurs in the absence of trade, does specialization yield increases in output? [2 Marks]

(VII). If so, by how much? [3 Marks]

(C) (I). Within what limits will the terms of trade lie if specialization and trade occur? [2 Marks]

(II). Suppose Japan and Zambia agree to a terms-of-trade ratio of 1:1 (1 Car to 1ton of Copper). Draw the terms-of trade line in the diagram of each nation. [2 Marks]

(III). Assuming that 500 Cars are traded for 500 tons of Copper, are Japanese consumers better off as the result of trade? [2 Marks]

(IV). If so, by how much? [2 Marks]

(V). Assuming that 500 Cars are traded for 500 tons of Copper are Zambian consumers better off as the result of trade? [2 Marks]

(VI). If so, by how much? [2 Marks]

(VII). Describe the trade triangles for Japan and Zambia. [3 Marks]

[TOTAL: 40 Marks]