1. Consider Ethiopia’s and Nigeria’s economy operating under Ricardian model where labor is the…

1. Consider Ethiopia’s and Nigeria’s economy operating under Ricardian model where labor is the only factor of production to produce two primary products say processed coffee and cacao bean. In Nigeria it takes a man 7 days and 24 hours to process a quintal (100 KG) of coffee and 1 KG of cacao bean respectively. On the other hand, in Ethiopia it requires 2 days to process a quintal (100 KG) of coffee and 20 hours to process 1 KG of cacao bean. Suppose there are 350 work days in Nigeria and 250 work days in Ethiopia (because of many holydays). Given that the number labor forces participated in production of both goods are 2 million in Nigeria and 2.8 million in Ethiopia. I- Two good case a) Calculate total labor(work) days in each country (Hint: multiply the number of labor forces by the number of work days. Then you can convert it to hours) ______________________________________________________________________________________________________________________________________________ b) Find the production possibility frontier equation for both countries. If Nigeria specializes on production of coffee what maximum quintals of coffee can be produced per-hour? ______________________________________________________________________________________________________________________________________________ c) Draw production possibility frontiers of both countries by putting coffee production along horizontal and cacao production along vertical axis. Calculate the slope of each PPF curve. Calculate opportunity cost of producing one more KG of coffee interms of cacao in each country. Which country has comparative advantage in coffee production in terms of cacao bean? _________________________________________________________________________________________________________________________________________________________________________________________________________________________________ d) If price of one KG of coffee is 3$ (~90ETB) and price of one KG of cacao bean is 50$, By comparing relative prices with relative opportunity cost, identify on which sector each country should specialize. Calculate a gain from trade for Ethiopia by comparing indirect method of production against direct methods of production _____________________________________________________________________________________________________________________________________________________________________________________________________________________ e) Calculate an hourly wage rate of labor if each country specializes on the goods on which they have comparative advantage. Which country pays better salary per hour? Also Calculate the relative wage rate in Ethiopia in terms of Nigeria’s. _____________________________________________________________________________________________________________________________________________________________________________________________________________________ II. multiple good case a. Assume in addition to the above coffee and cacao there is one more-good which is tradable between the two countries, which is raw meat. If 1 labor hour and 0.5 labor hour is required to produce 1 KG of raw meat in Nigeria and in Ethiopia respectively, calculate the labor requirement ratio of production of three goods in Nigeria in terms of Ethiopia (a*Li/aLi) and arrange them in descending order ______________________________________________________________________________________________________________________________________________________ b. If the relative wage rate in Ethiopia in terms of Nigeria is 1.5, which goods are produced where? ___________________________________________________________________________ If transportation cost of 100% for coffee, 50% for cacao and 25% for raw meat are applicable where the goods are produced, identify which goods are produced which country and identify non-tradable good. ______________________________________________________________________________________________________________________________________________________

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