(a.) The following table shows the opportunity costs of producing each of the two goods in each of the two countries. The opportunity cost of producing a good is the amount of another good that must be sacrificed to produce 1 unit of the good. Consider Iguania. If it devotes all its resources to penicillin production its output will be 4 bottles but the sacrifice is 12 loaves of bread. The opportunity cost of producing 1 bottle of penicillin is therefore 3 loaves of bread (i.e., 12/3). Similarly, its opportunity cost of bread production is 0.33 bottles of penicillin (i.e., 4/12).

(b.) A country has a comparative advantage in the production of a good if its opportunity cost of producing the good is lower than that of another country. Therefore, Iguania has the comparative advantage in bread production since its opportunity cost per loaf is only 0.33 bottles of penicillin, whereas the opportunity cost in Camelia is 1.33 bottles. On the other hand, Camelia has the comparative advantage in penicillin production with an opportunity cost of 0.75 loaves of bread versus 3 loaves of bread in Iguania.

If free trade prevails, then Iguania should specialize in bread production, where it has the comparative advantage, and Chamelia should specialize in penicillin production, where it has the comparative advantage. It would then be possible for the two countries to produce the maximum possible quantities of the two products, specifically, 12 loaves of bread and 6 bottles of penicillin.

(c.) In answering this question, it is assumed that the claims of unfair trade practices are bogus. In that case, with a mutual embargo in place, potentially both countries lose. The maximum potential combined production of the two products would fall. Exactly how the gains from trade discussed in part (b.) would have been divided between the two countries depends on tastes in each country and the prices for bread and wine that are established with trade in effect. At least one of the countries would have gained from trade, however, and quite possibly both would have. So, at least one country and probably both would lose from the embargo. Neither country would win from the embargo.

(d.) If, after a long embargo, trade is resumed between these two countries, at least one and probably both of the countries would benefit. As discussed, the division of the benefits between the two countries would depend on tastes and the prices established. It is not possible, from the information given, to predict which country would gain more.