Argentina and New Zealand each produce wheat and mutton under conditions of perfect competition, as shown on the accompanying production possibilities curves. Assume that there is no trade between the two countries and that Argentina is now producing at point A and New Zealand at point C. What is the opportunity cost of producing each good in Argentina? What is the opportunity cost of producing each good in New Zealand? Which country has a comparative advantage in which good? Explain.
Explain how international trade would affect wheat production in Argentina. How would international trade affect mutton production? Explain how international trade would affect wheat production in New Zealand. How would it affect mutton production? How would trade between the two countries affect consumption of wheat and mutton in each country? Assume that trade opens between Argentina and New Zealand and that, with trade, a pound of mutton exchanges for a bushel of wheat. Before trade, Argentina produced at point A and New Zealand produced at point C. Argentina moves to point B, while New Zealand moves to point D.
Calculate and illustrate graphically an exchange between Argentina and New Zealand that would leave both countries with more of both goods than they had before trade. Assume that the world market for producing radios is monopolistically competitive. Suppose that the price of a typical radio is $25. Why is this market likely to be characterized by two-way trade?
Suppose that Country A levies a tax of $5 on each radio produced within its borders. Will radios continue to be produced in Country A? If they are, what will happen to their price? If they are not, who will produce them? If you concluded that radios will continue to be produced in Country A, explain what will happen to their price in the short run. Illustrate your answer graphically. What will happen to their price in the long run?