In a Ricardo-type model, if Portuguese workers can produce three times as much wine per Day as English workers but only twice as much cloth per day as English workers, then, if Portuguese wages are 30 euros per day, the upper limit to English wages per day is __________. (Assume 1 euro = £1.)
A) £10
B) £15
C) £60
D) £90

Question

Quizplus · Accepted Answer

In a Ricardo-type model, wages are determined by the productivity of labor. If Portuguese workers can produce three times as much wine as English workers per day, then their productivity ratio is 3:1. Similarly, if Portuguese workers can produce twice as much cloth as English workers per day, then their productivity ratio is 2:1.

Given that Portuguese wages are 30 euros per day, we can use the productivity ratios to calculate the upper limit of English wages. We can start by assuming that English wages are x euros per day.

Then, using the productivity ratios, we can say that Portuguese workers can produce 3x euros worth of wine and 2x euros worth of cloth in a day. Similarly, English workers can produce x euros worth of wine and 1x euros worth of cloth in a day.

Since wages are equal to the value of output produced, we can equate the value of output produced by Portuguese workers and English workers:

3x euros (Portuguese wine) + 2x euros (Portuguese cloth) = x euros (English wine) + x euros (English cloth)

Simplifying this equation, we get:

3x + 2x = 2x + x 
5x = 3x

x = 30/5 = 6

Therefore, the upper limit to English wages per day is 6 euros, which is equivalent to £6. Since the answer choices are in pounds, we can convert this amount using the given exchange rate of 1 euro = £1. Thus, the answer is £6 x 1 = £6.

However, we need to be careful when choosing the answer, as the question asks for the upper limit of English wages, not the actual amount. The upper limit is the maximum wage that English workers can earn while still maintaining a comparative advantage in cloth production. We can calculate this upper limit as follows:

The opportunity cost of producing one unit of cloth in England is one unit of wine. Therefore, the maximum wage that English workers can earn while maintaining a comparative advantage in cloth production is the amount that equals the price of one unit of wine in Portugal:

1 unit of wine in Portugal = 3x euros = 3 x 6 euros = 18 euros

Using the exchange rate of 1 euro = £1, we get:

18 euros = £18

Therefore, the upper limit to English wages per day is £18, which is equivalent to answer choice B.

In a Ricardo-Type Model, If Portuguese Workers Can Produce Three