Calculate the opportunity cost of roses and bananas

Reference no: EM133278116

Question - Consider the economy of two countries: Ecuador (E) and Colombia(C) initially not trading with each other. Each country has 1000 workers for producing bananas (B) and roses (R). An Ecuadorian worker can produce 10 roses or 25 bananas while a Colombian worker can produce 50 roses or 30 bananas.

(a) Calculate the opportunity cost of roses and bananas in Ecuador and Colombia. Which country has comparative advantage in roses and bananas?

(b) Draw the production possibilities frontier for Ecuador and Colombia. What does the slope of the production possibilities frontier represent? Explain.

i. What pattern of trade would one expect?

ii. What do we know about the relative price of roses under free trade?

iii. How does allocation of workers across industries change after trade?

(d) Are Ecuadorian workers better off in terms of bananas and roses under free trade? Explain your answer.

(e) Is the wage in Ecuador higher than that in Colombia after opening to trade? Explain your answer.

Reference no: EM133278116

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