Imagine a world with just two countries, called France and Germany. Both have 25 million workers. Consider the potential for trade in jus and fizz between France and Germany. Technology is such that each worker, working for a week, can produce the following number of bottles:
France Germany
Jus 4 4
Fizz 2 8
a) Draw the production possibility frontiers for fizz and jus in France and Germany.
b) What is the opportunity cost of producing a bottle of fizz in France and in Germany? In which country is the opportunity cost of producing fizz higher?
c) In both countries, consumers like to drink two bottles of fizz to each bottle of jus. In the absence of international trade, how much fizz and how much jus will it be possible to drink in these proportions in each of the two countries?
d) On the international market, the price of jus is 8 Euros per bottle while fizz costs 12 Euros. If France is to take maximum advantage of international trade, should France specialize in the production of fizz or jus?
e). How much jus and how much fizz will it be possible to consume in each of the two countries, given consumer preferences and international prices? Do both countries gain from trade?
[HINT: Try assuming that each country specializes entirely in the production of one good. Then write down an equation so that the value of that good produced is equal to the value of the amounts of jus and fizz consumed. Now write down an expression for the preferences of consumers and solve. Alternatively you could solve this by drawing the budget constraint and preferences on graph paper].
f). Will the amount of jus that France wishes to export equal the amount of jus that Germany wishes to import under these conditions?