Question

The nations of Pamland and Lillytonia can produce two goods, DVD

players and wheat. In a single year, Pamland can produce 150 DVD players
or 300 bushels of wheat and Lillytonia can produce 200 DVD players or
600 bushels of wheat. Which of the following deals would Pamland and
Lillytonia be willing to accept? *
A) There are no deals for trade that Lillytonia would be willing to accept because
Lillytonia could make more of both goods.

B) Lillytonia sells 1/4 bushels of wheat to Pam and gets 1 DVD player in return.

C) Lillytonia sells 4 bushels of wheat to Pam and gets 1 DVD player in return.

D) Lillytonia sells 2.5 bushels of wheat to Pam and gets 1 DVD player in return.

D) Lillytonia sells 2/5 bushels of wheat to Pam and gets 1 DVD player in return

Answer 1

The best deal would be option B) that is

Lillytonia sells 1/4 bushels of wheat to Pam land and gets 1 DVD player in return.

Step-by-step explanation:

STEP 1

The output of DVD per unit of labor for Pamland = 150.

The output of Bushels of wheat per unit of labor for Pamland= 300.

The output of DVD per unit of labor for Lillytonia = 200.

The output of Bushels of wheat per unit of labor for Lillytonia= 600.

STEP 2

To calculate the comparative advantage, we use the following formula:

Comparative Advantage = DVD Output / Wheat Output

STEP 3

In Pamland, the opportunity cost, or the comparative advantage, of DVD is

300 / 150 = 2 bushels of wheat.

The opportunity cost of wheat in Pamland is 120/ 300 = 0.5 DVDs.

In Lillytonia the opportunity cost, or comparative advantage, of DVD is 600/200 = 3 bushels of wheat, while

The opportunity cost of wheat in Lillytonia is 200/600 = 1/3 or 0.33333 DVDs

STEP 4

As is clear from the calculations, Pamland should produce more wheat because it has the lower opportunity cost during production 2 against 3 for Lillytonia. Conversly, Lillytonia has the lowest opportunity cost for the production of DVD clocking 1/3 against a higher 1/2 for Pamland.

The countries should therefore trade in such a way that Pamlan is selling it's Wheat while Lillytonia is selling it's DVDs.

STEP 5

Given that Pamland's 2 bushels of wheat will cost it 0.5 DVDs, 4 bushels will thus cost it 1 DVD. It is impracticable (in any case) to have 1/2 of a DVD player.

Cheers