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Assume that Home and Foreign produce only two goods - Butter and Wheat. Home has 80 units of labour available. In-Home, the unit labour requirement in Butter production is 8 and in Wheat production, it is 4. On the other hand, Foreign has 90 units of labour available. Foreign's unit labour requirement in Butter production is 15, while in Wheat production it is 3.
a. Graph both Home's and Foreign's production possibility frontiers with the quantity of Butter measured on the horizontal axis and the quantity of Wheat on the vertical axis.
b. Calculate the opportunity cost of producing Butter in terms of Wheat in both Home and Foreign.
c. In the absence of trade, what would the price of Butter in terms of Wheat be in both countries? Why?
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