Suppose there are two countries with the same production technologies. Let labor productivity in butter production be ten pounds per hour at all levels of output and productivity in gun production be one-half of a gun per hour when gun production is less than ten and two-thirds of a gun per hour when production is ten or more. Suppose each country has fifty hours of labor and in autarky produces eight guns.
a. Calculate how many pounds of butter each country produces in autarky.
b. What is the total world output of guns and butter in autarky?
Next, suppose Country A produces all the guns in the world while Country B specializes in butter production.
c. Calculate the quantity of butter produced by Country A and Country B.
c. What is total world output of guns and butter now?
c. Identify a terms of trade (guns for butter) that will assure that each country is at least as well off after trade as before.