Reference no: EM133440699

ASSIGNMENT:

Suppose that in a year Indonesia can produce either 50 million tonnes of petrol or 20 million tonnes of iron or any linear combination, for example, 25 million tonnes of petrol and 10 million tonnes of iron. Also suppose that in a year Australia can produce either 80 million tonnes of petrol or 64 million tonnes of iron or any linear combination, for example, 20 million tonnes of petrol and 48 million tonnes of iron.

Explain which country has the absolute advantage in:

petrol production?

iron production?

Calculate and explain what is the opportunity cost of producing 1 tonne of iron:

for Australia?

for Indonesia?

Explain which country has the comparative advantage and should specialise in iron production.

Calculate and explain what is the opportunity cost of producing 1 tonne of petrol:

for Australia?

for Indonesia?

Explain which country has the comparative advantage and should specialise in petrol production.

Suppose that Indonesia suggests that Australia sells iron to Indonesia for 2.0 tonnes of petrol for every tonne of iron, and equivalently it will sell tonnes of its petrol to Australia for 0.5 tonnes of petrol for every tonne of iron.

Will Australia accept this offer? Explain why or why not?

Suppose Australia wants 30 tonnes of petrol and Indonesia wants 20 tonnes of petrol and as much iron as they can get. Show that Indonesia and Australia can have more iron while still meeting their petrol requirements when they specialise and trade than when they do not.