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14 November, 19:32

The Dominican Republic and Nicaragua both produce coffee and rum. The Dominican Republic can produce 18 thousand tons of coffee per year or 9 thousand barrels of rum. Nicaragua can produce 8 thousand tons of coffee per year or 2 thousand barrels of rum.

a. Suppose the Dominican Republic and Nicaragua sign a trade agreement in which each country would specialize in the production of either coffee or rum.

Which country should specialize in coffee? (Click to select) The Dominican Republic Nicaragua

Which country should specialize in rum? (Click to select) The Dominican Republic Nicaragua

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  1. 14 November, 20:19
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    For the purpose of export, country having comparative advantage of producing a goods is produced by it. For it, opportunity cost of production is estimated.

    In the present case the opportunity cost of producing coffee, Nicaragua has lower opportunity cost (1/4 of a barrel of rum for each unit of coffee vs 1/2 barrel of rum for Dominica republic)

    Nicaragua should therefore produce coffee and Dominica should produce Rum.
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