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ID: 1123981 • Letter: I
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ide tmail MyLabhus Pearson ConnectSIMnet . Keep IT SIM Help Save & Exit Sub Check my wor The following hypothetical production possibilities tables are for China and the United States. Assume that before specialization and trade the optimal product mix for China is alternative D and for the United States is alternative S. China Production Possibilities Product 18,900 8,000 6,800 Chemicals(tons) 12 16 28 U.S. Production Possibilities Product 30,024, 00018,80012,000 12 6,000 24 Chemicals(tons) 18 30 Instructions: Enter your answers as whole numbers a. Are comparative-cost conditions such that the two countries should specialize? 10:53 P o searExplanation / Answer
(a) Opportunity cost of producing 1 Apparel to China = 12/4000 = 3/1000 units tons of chemical
and the opportunity cost of producing 1 ton of chemical to China = 1000/3 units of apparels.
Similarly, the opportunity cost of producing 1 Apparel to US = 1/4000 tons of chemicals and the opportunity cost of producing 1 ton of chemical to the US = 4000 units of apparels.
Since the opportunity cost of producing apparels is lower in US than China and the opportunity cost of 1 ton of chemical is lower in China, thus China has a cost-advantage in chemical production and US has a cost-advantage in Apparel production.
China should produce Chemicals and US should produce apparels.
(b) Total apparels produced after specialization = 48000 apparels and total chemicals produced after specialization = 24 tons of chemicals.
Thus, gain in apparels = 20000 units and gain in chemicals = 6 tons.
(c) Limits of terms of trade:
2000 units of apparel for 1 ton of chemicals and 4000 units of apparel for 2 tons of chemical.
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