If 1 bottle of wine costs 4 loaves of bread in England, then 1 loaf of bread must cost 1/4 bottle of wine. For England to specialize in bread production, England must be a more efficient bread producer than Portugal, which means that England's cost of producing bread must be less than Portugal's cost. Thus if producing 1 loaf of bread in Portugal costs more than 1/4 bottle of wine (or, equivalently, if producing 1 bottle of wine in Portugal costs less than 4 loaves of bread), then England will specialize in bread production and Portugal will specialize in wine production.

Question

(i) What is the cost of growing a bushel of wheat in each state? What is the cost of growing a bushel of corn in each state?
(ii) Suppose each state is self-sufficient and there is no trade. If each state chooses to produce equal amounts of the two crops, how much wheat and corn will each state produce?
(iii) If the two states begin to trade, with each specializing in its area of comparative advantage, which state will produce wheat and which state will produce corn? How will the total production between the two states compare to the situation where each was self-sufficient?

Answer 1

(i) One bushel of wheat costs 1/2 bushel of corn in North Dakota and costs 1 1/2 bushels of corn in Iowa. One bushel of corn costs 2 bushels of wheat in North Dakota and costs 2/3 bushel of wheat in Iowa.
(ii) To get equal amounts of the two crops, North Dakota must use 1/3 of its farmland to grow wheat and the other 2/3 to grow corn, giving it 2,000 bushels of wheat and 2,000 bushels of corn. Iowa must use 3/5 of its farmland to grow wheat and the other 2/5 to grow corn, giving it 2,400 bushels of wheat and 2,400 bushels of corn.
(iii) North Dakota is the low-cost wheat producer and Iowa is the low-cost corn producer, so North Dakota will produce 6,000 bushels of wheat and Iowa will produce 6,000 bushels of corn. Total production has increased by 1,600 bushels of each crop over the situation where the two states were self-sufficient.