Production (1 Hour of Labor Time)
Country Cloth Wheat
Britain 6 3
Canada 3 1
3. Assume two countries (Canada & Britain) each produce wheat and cloth. Given the
following details with respect to resources required to produce each good in each
country, answer the following questions.
a. What is the opportunity cost of producing each good in each country? (4 Points)
b. Draw the Production Possibilities Frontier for each country assuming no trade and
500,000 labor hours. (8 Points)
c. Provide an interpretation of the slope of the PPF in this example (6 Points)
d. If these countries engaged in international trade, in what range would the relative prices
have to be to ensure mutually beneficial trade, and which good would each country
specialize in? (6 Points)
e. Assuming the relative price with trade of wheat is 2.5 cloth and the relative price of
cloth is .4 wheat, calculate the gains from trade and show on the PPFs the expanded
consumption choices for each country. (10 Points)
