Question

Assume the following information about Russia and Canada for the production of cases of vodka and pallets of construction grade 2 x 4 lumber. With one unit of production (a mixture of land, labor, capital, and technology) Russia can produce 10 cases of vodka or 8 pallets of 2 x 4 lumber. Canada can produce 6 cases of vodka or 12 pallets of 2 x 4 lumber with each unit of production. Each country dedicates a total of 1000 units of production for vodka and lumber. This information is reproduced in the following table.

Country Vodka (Cases) Lumber (Pallets)

Russia 10 8

Canada 6 12

1. If Russia and Canada each dedicate 400 units of production to vodka and 600 units of production to lumber, what is the total amount of vodka and lumber that will be produced?

(a) 10,000 cases of vodka and 12,000 pallets of lumber

(b) 6,400 cases of vodka and 12,000 pallets of lumber

(c) 9,600 cases of vodka and 8,000 pallets of lumber

(d) 12,000 cases of vodka and 10,000 pallets of lumber

Answer:

2. If Russia and Canada decide to specialize in the production of vodka and lumber, what is the total amount of vodka and lumber that will be produced?

(a) 12,000 cases of vodka and 10,000 pallets of lumber

(b) 9,600 cases of vodka and 8,000 pallets of lumber

(c) 10,000 cases of vodka and 12,000 pallets of lumber

(d) 6,600 cases of vodka and 12,000 pallets of lumber

Answer:

3. It will be beneficial for both Russia and Canada to trade as long as the trading ratio of vodka to lumber is between _________________.

(a) 5/3 and 5/4

(b) 1/2 and 1/4

(c) 4/5 and 2/1

(d) 5/4, and 1/2

Answer:

4. At a trading ratio of 7/8 (cases of vodka for pallets of lumber), or 7 cases for 8 pallets of lumber

(a) Russia gains 100% of the benefits of trade

(b) Canada gains 100% of the benefits of trade

(c) Canada and Russia evenly split the advantage brought about by trade

(d) In this example, neither country benefits from international trade

Answer 1

The total amount of vodka and lumber produced when Russia and Canada each dedicate 400 units of production to vodka and 600 units of production to lumber is 10,000 cases of vodka and 12,000 pallets of lumber.

Step-by-step explanation:

To find the total amount of vodka and lumber produced when Russia and Canada each dedicate 400 units of production to vodka and 600 units of production to lumber, we need to calculate the production of each country for vodka and lumber separately.

For Russia: With 400 units of production for vodka, Russia can produce (400 / 10) = 40 cases of vodka. With 600 units of production for lumber, Russia can produce (600 / 8) = 75 pallets of lumber.

For Canada: With 400 units of production for vodka, Canada can produce (400 / 6) = 66.67 cases of vodka (rounding to the nearest whole number). With 600 units of production for lumber, Canada can produce (600 / 12) = 50 pallets of lumber.

Therefore, the total amount of vodka and lumber produced is 40 cases of vodka + 66 cases of vodka = 106 cases of vodka, and 75 pallets of lumber + 50 pallets of lumber = 125 pallets of lumber. So the correct answer is (a) 10,000 cases of vodka and 12,000 pallets of lumber.

Answer 2

1. The total amount of vodka and lumber produced when Russia and Canada dedicate 400 units of production to each is 9,600 cases of vodka and 8,000 pallets of lumber. 2. If Russia and Canada specialize in the production of vodka and lumber, the total production is 10,000 cases of vodka and 12,000 pallets of lumber. 3. The trading ratio of vodka to lumber must be between 0.8 and 2 for trade to be beneficial for both countries. 4. At a trading ratio of 7 cases of vodka for 8 pallets of lumber, Canada gains 100% of the benefits of trade.

Step-by-step explanation:

1. If Russia and Canada each dedicate 400 units of production to vodka and 600 units of production to lumber, the total amount of vodka and lumber that will be produced can be calculated by multiplying the units of production by the production rate for each country and adding the results. For Russia, the total vodka production is 400 * 10 = 4000 cases. The total lumber production is 400 * 8 = 3200 pallets. For Canada, the total vodka production is 400 * 6 = 2400 cases. The total lumber production is 400 * 12 = 4800 pallets. Adding the totals for each country, we get a total of 4000 + 2400 = 6400 cases of vodka and 3200 + 4800 = 8000 pallets of lumber. Therefore, the correct answer is (c) 9,600 cases of vodka and 8,000 pallets of lumber.

2. If Russia and Canada decide to specialize in the production of vodka and lumber, the total amount of vodka and lumber that will be produced can be calculated by multiplying the units of production for each country by their production rate for the specialized good and adding the results. For Russia, the total vodka production is 1000 * 10 = 10,000 cases. The total lumber production is 1000 * 8 = 8,000 pallets. For Canada, the total vodka production is 1000 * 6 = 6,000 cases. The total lumber production is 1000 * 12 = 12,000 pallets. Adding the totals for each country, we get a total of 10,000 + 6,000 = 16,000 cases of vodka and 8,000 + 12,000 = 20,000 pallets of lumber. Therefore, the correct answer is (c) 10,000 cases of vodka and 12,000 pallets of lumber.

3. The trading ratio of vodka to lumber that is beneficial for both Russia and Canada can be determined by comparing their opportunity costs of production. Let's assume that the trading ratio of vodka to lumber is x/y, where x is the number of cases of vodka and y is the number of pallets of lumber. The opportunity cost of producing vodka in Russia is 8/10 = 0.8 pallets of lumber per case of vodka. The opportunity cost of producing vodka in Canada is 12/6 = 2 pallets of lumber per case of vodka. Therefore, the trading ratio should be between 0.8 and 2, or 0.8 <= x/y <= 2. The correct answer is (a) 5/3 and 5/4.

4. At a trading ratio of 7 cases of vodka for 8 pallets of lumber, the opportunity cost for Russia is 8/7 = 1.14 pallets of lumber per case of vodka, while the opportunity cost for Canada is 6/8 = 0.75 pallets of lumber per case of vodka. Since the opportunity cost of producing vodka in Canada is lower than in Russia, Canada has a comparative advantage in producing vodka. Therefore, Canada gains 100% of the benefits of trade. The correct answer is (b) Canada gains 100% of the benefits of trade.