Task 2. Assume that Saxony has 500 labor hours per week, while Leinster has 1200. Both countries produce bicycles and roller skates. In Saxony, the labor requirement for a bicycle is 20 hours, while a roller skate costs 10. In Leinster, the labor requirement for a bicycle is 15 hours, while a roller skate costs 8 hours. In both countries, there are constant costs of production. a, Plot the production possibility curves for both countries. Plot community indifference curves as well and indicate a possible point of consumption and production (assuming there is no trade between the two countries)! Don't forget to name the axes. b, Calculate the opportunity cost of bicycle and roller skate in both countries. Which country has a comparative advantage in producing bicycle? And which one in roller skate? Why? c. Suppose trade opens up between the two countries and the international price of roller skate settles at 1.9 bicycle. Can this be the international price? d, Due to large scale investments in machinery needed to produce roller skates, labour requirements change in Saxony's roller skate industry. The new labour cost of roller is 4 hours. Which country will have comparative (or absolute) advantage in producing roller skate now? Why?
Task 2. Assume that Saxony has 500 labor hours per week, while Leinster has 1200. Both countries produce bicycles and roller skates. In Saxony, the labor requirement for a bicycle is 20 hours, while a roller skate costs 10. In Leinster, the labor requirement for a bicycle is 15 hours, while a roller skate costs 8 hours. In both countries, there are constant costs of production. a, Plot the production possibility curves for both countries. Plot community indifference curves as well and indicate a possible point of consumption and production (assuming there is no trade between the two countries)! Don't forget to name the axes. b, Calculate the opportunity cost of bicycle and roller skate in both countries. Which country has a comparative advantage in producing bicycle? And which one in roller skate? Why? c. Suppose trade opens up between the two countries and the international price of roller skate settles at 1.9 bicycle. Can this be the international price? d, Due to large scale investments in machinery needed to produce roller skates, labour requirements change in Saxony's roller skate industry. The new labour cost of roller is 4 hours. Which country will have comparative (or absolute) advantage in producing roller skate now? Why?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Task 2. Assume that Saxony has 500 labor hours per week, while Leinster has 1200. Both
countries produce bicycles and roller skates. In Saxony, the labor requirement for a
bicycle is 20 hours, while a roller skate costs 10. In Leinster, the labor requirement for a
bicycle is 15 hours, while a roller skate costs 8 hours. In both countries, there are constant
costs of production.
a, Plot the production possibility curves for both countries. Plot community indifference curves
as well and indicate a possible point of consumption and production (assuming there is no trade
between the two countries)! Don't forget to name the axes.
b, Calculate the opportunity cost of bicycle and roller skate in both countries. Which country
has a comparative advantage in producing bicycle? And which one in roller skate? Why?
c, Suppose trade opens up between the two countries and the international price of roller skate
settles at 1.9 bicycle. Can this be the international price?
d, Due to large scale investments in machinery needed to produce roller skates, labour
requirements change in Saxony's roller skate industry. The new labour cost of roller is 4 hours.
Which country will have comparative (or absolute) advantage in producing roller skate now?
Why?
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