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*** SEE UPLOADED DOCUMENT NAMED "DOC 2" FOR CHARTS PERTAINING TO THIS PROBLEM***


Assume Bert's

Country and Ernie's Country each have the same amount of resources with which to produce wheat and corn and they produce no other goods. The Figures below represent the production possibilities of each good for each Country. Assume further that without trade, Bert is producing and consuming at point X (200 Wheat and 50 Corn) and Ernie is producing and consuming at point Y (150 Wheat and 75 Corn). 


a.      Determine and report the opportunity cost of producing 1 bushel of corn in (1) namBert's Country and (2) Ernie's Country?

 

b.     Which country has a comparative advantage in the production of wheat? Briefly explain why.

 

c.      Identify specifically the potential gains from trade if each country specializes completely in the good for which it has a comparative advantage and then trades with the other country for the other good.

 


d.     Identify the terms of trade that Bert should be willing to accept.

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