Consider two countries, Italy and France, which produce wine and cheese. Each has 200 units of labor. Both countries face constant opportunity costs in producing wine and cheese. France requires 4 units of labor to produce a bottle of wine, and 2 units to produce 1 pound of cheese. In Italy, 2 units of labor are necessary to produce a bottle of wine, while 4 units are required to make 1 pound of cheese.

a. What is the opportunity cost of producing a bottle of wine in Italy? In France?

b. What is the opportunity cost of producing 1 pound of cheese in Italy? In France?

c. Which country has a comparative advantage in wine production? In cheese?

d. If each country specializes completely according to its comparative advantage, how many bottles of wine and how many pounds of cheese will be produced?

e. If political tensions cause leaders in both countries to worry about their dependence on foreign goods, and they therefore require their labor to be equally divided between wine and cheese production, how many bottles of wine and pounds of cheese will be produced?

f. What are the gains from trade when comparing the outcome in part d with the isolationist approach in part e?

The opportunity cost of producing a bottle of wine in France = 2 pounds of cheeseOpportunity cost of producing a bottle of wine in Italy = 1 pound of cheese. The opportunity cost of producing a pound of cheese in France = ½ bottle of wine. The opportunity cost of producing a pound of cheese in Italy = ½ bottle of wine.

France has an opportunity cost of 2 pounds of cheese per bottle of wine. Italy has an opportunity cost of 1 pound of cheese per bottle of wine. Therefore, Italy has a comparative advantage in wine production. France has an opportunity cost of ½ bottles of wine per pound of cheese. Italy has an opportunity cost of ½ bottle of wine per pound of cheese. Therefore, Italy has no comparative advantage in cheese production.d. Specialization of production. Italy will produce only wine.200 labor / 2 labor per bottle of wine = 100 bottles of wine. France will produce only cheese, 200 labor / 2 labor per pound of cheese = 100 pounds of cheese.

France will produce 50 bottles of wine (200/4) and 50 pounds of cheese (200/2). Italy will produce 50 bottles of wine (200/4) and 50 pounds of cheese (200/4). Gains from trade occur when each country specializes in the product in which they have a comparative advantage and then trades with each other. In this case, Italy will trade its wine to France for cheese. As a result, both countries will gain more of each good at a lower cost.

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