Assignment
Until recently, the countries of Danoli and Herapi have been isolated from one another by an unnavigable stretch of ocean. Due to a large government grant, a six-lane bridge has been built between the two countries. Prior to the opening of the bridge, the two countries have been self-sustaining, producing the following:
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Coconuts
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Machetes
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Danoli
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300
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50
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Herapi
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100
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25
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You are the newly elected trade minister for the country of Danoli and have been task with developing trade with the people of Herapi. Your biggest challenge is convincing the leaders of your country to engage in trade.
Be sure to include, in your write-up, details of the following:
A. Describe what conditions might determine why the countries produce at this level of output for the two goods.
B. Which country has the absolute advantage in producing each good and who has the comparative advantage, and the latter is most important in the decision to trade. (Give your numbers on this one).
C. Explain why opportunity costs are relevant in the discussion of trade.
D. What terms of trade would make exchange beneficial to most (you may give a range)?
E. Given a terms of trade you set, what would be the outcome if we indeed trade with Herapi?
F. How many coconuts and machetes would each country have after trade?