(a) Argentina should specialize in producing wine because it takes them 4 hours to produce 1 bottle of wine, while producing 1 lb. of coffee takes them 2 hours. On the other hand, Brazil should specialize in producing coffee because it takes them 1 hour to produce 1 lb. of coffee, while producing 1 bottle of wine takes them 5 hours. Therefore, Argentina will produce 2,500 bottles of wine (10,000/4) and Brazil will produce 10,000 lbs. of coffee (10,000/1).
(b) Argentina will export wine to Brazil because Argentina specializes in wine production while Brazil specializes in coffee production. Brazil will export coffee to Argentina because Argentina specializes in wine production while Brazil specializes in coffee production. Both countries will import the product in which it do not specialize. Therefore, Argentina will import coffee from Brazil, and Brazil will import wine from Argentina.
(c) Both countries are willing to accept the suggested amount of exports and imports because it allows them to specialize in the production of the good in which they have a comparative advantage. Comparative advantage means that a country can produce a good at a lower opportunity cost than another country. By specializing in production, both countries can produce more volume of the product at a cheaper cost, which benefits their economies in the long run. Importing products they lack the comparative advantage in means they can get those goods at a cheaper price than they would be able to produce them domestically.
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