Hereland and Thereland are two small countries. Each currently produces both milk and corn, and they do not trade. If Hereland puts all its resources into milk, it can produce 2 tanker truckloads, while if it puts all its resources in corn production, it can produce 8 tons. Thereland can produce either 2 loads of milk or 2 tons of corn. (Both can also produce any combination on a straight line in between.)
a. Draw and label production-possibilities frontiers for Hereland and Thereland.
b. Suppose that Hereland's citizens would like 1 truckload of milk and 6 tons of corn. Can Hereland produce this?
c. Suppose that Thereland's citizens would like 1 load of milk and 2 tons of corn. Can Thereland produce this?
d. What is the slope of Hereland's PPF? Fill in the blank: "For each truckload of milk that Hereland makes, it must give up making ___ tons of corn."
e. What is the slope of Thereland's PPF? Fill in the blank: "For each truckload of milk that Thereland makes, it must give up making ___ tons of corn."
f. Which country has a comparative advantage in producing milk?
g. Create a table similar to Table 7.1, showing how Hereland and Thereland could enter into a trading relationship in order to meet their citizens' consumption desires as described in (b) and (c).
h. Suppose that you are an analyst working for the government of Hereland. Write a few sentences, based on the above analysis, advising your boss about whether to undertake trade negotiations with Thereland.
i. Would your advice change if you knew that unemployment in Hereland is high and that retraining corn farmers to be dairy farmers, or vice versa, is very difficult to do?
j. Would your advice change if Thereland insisted in trade negotiations that 1 truckload of milk be exchanged for exactly 4 tons of corn?
