The "Home" country has 1200 units of labor at its disposal. It can produce two goods: apples
and bananas. To produce 1 kg of apples, 3 units of labor are required, for 1 kg of bananas, 2
units of labor are required.
a) Graphically represent the production options curve of Home.
b) What is the opportunity cost for the Home of apples in terms of bananas?
c) In the absence of trade, what will be the price of apples in terms of bananas?

Now imagine that there is another country, "Outside," which has 800 units of labor at its
disposal. It also produces apples and bananas. To produce 1 kg of apples, 5 units of labor are
required, for 1 kg of bananas, 1 unit of labor is required.
d) Draw the "Outside" production options curve on a graph.
e) Suppose that in autarkie (= self-sufficient economy), each country uses half of its labor
supply in the production of each product. What is the production? Present this on the graph in
(d).
f) What would be a trade situation (specialization + terms of trade) that would be beneficial
for both countries?
g) Between which two values should the terms of trade lie so that trade is beneficial for both
countries?

Answer rating: 100% (QA)

a The production options curve of Home is a downward sloping curve that starts from the origin with ... View the full answer