Question 1:

Australia can produce 36 thousand tonnes of apple or 12 thousand tonnes of orange in a year. During the same one year period, New Zealand can produce 18 thousand tonnes of apple or 18 tonnes of orange.

a. Draw Australia's and New Zealand's production possibilities curves for producing apples and oranges. Assume the production possibility curves are linear.

b. Who has absolute advantage in producing apples? Who has absolute advantage in producing oranges? Explain your reasoning.

c. Who has a comparative advantage in producing apples? Who has comparative advantage in producing oranges? Explain your reasoning.

d. Suppose that both countries are currently producing nine thousand tones of apples and nine thousand tonnes of oranges. Give an example of how both countries can be better off if they specialise in producing one good and then engage in trade.