Before taxes or trade, production costs of wine in France are 5 francs a liter, of good beer 12 francs a liter. In England, they are for wine 2 pounds a liter, for good beer one pound a liter. You would expect

You want to look for the low opportunity cost, so you need to figure out opportunity costs in terms of the other good in each place. In this question, you are not given production possibilities, you are given prices. But this makes it easier. Take France first:

Prices are wine 5 FF, beer 12 FF; so if you have 12 FF, you can buy 1 liter of beer or 2.4 liters of wine; so in France,

The opportunity cost of beer is 2.4 liters of wine, of wine is 2/5 of a liter of beer.

In England, prices are wine 2 pounds, beer 1 pound. So with 2 pounds, you could buy 1 liter of wine or 2 of beer. So in England, opportunity costs are of beer 1/2 a liter of wine, of wine 2 liters of beer.

So, comparatively, France is the low cost producer of wine, England of beer; so France will export wine, England beer.
 
 

1. a. France exports beer


b. England imports wine

c. France exports wine

d. England imports beer

e. b & c. This is the answer; with only two countries, what one exports, the other must import.
 
 

2. The opportunity cost of a liter of beer in France is:


a. 2.4 liters of wine; answer

b. 5/12 liters of wine

c. cannot tell from this information.
 
 

3. The opportunity cost of a liter of wine in France is:

1. Lower than its opportunity cost in England answer
2. higher than its opportunity cost in England
3. cannot tell from this amount of information.