k-ECON 2216-71 Princples of E MIN DTAP Problems & Applications (Ch 03) Attempts:
ID: 1134954 • Letter: K
Question
k-ECON 2216-71 Princples of E MIN DTAP Problems & Applications (Ch 03) Attempts: Do No Harm:15 6. Problems and Applications Q6 The following table describes the production possibilities of two cities in the country of Basebaliia: Pairs of Red Socks per Worker per Hour Pairs of White Socks per Worker per Hour Chicago Without trade, the price of a pair of white socks (in terms of red socks) in Boston is of red socks, and in Chicago it is of red socks has an absowe advantage in the production of red socks, and has an absolute advantage in the production of white has comparative advantage in the production of red socks, and has a comparative advantage in the production of white cties trade each other, Boston wi wilt export socks, and Chicago wiltl export The price cf expressed is terms The highest price at which white socks can be traded that would mass bote cties that makes Doth cities better off is 2 3 4 labExplanation / Answer
In the above table, it is shown that in Boston, with the same amount of input (the amount of labour or capital) 5 red socks or 2 white socks can be produced. In Chicago, with the same amount of input, either 4 red socks or 3 white socks can be produced. Here, we will look at the opportunity cost of producing white socks in terms of red socks i.e. the number of pairs of red socks that have to be given up to produce one pair of white socks.
For boston, the opportunity cost (or price) of white socks in terms of red socks is 5/2 = 2.5 pairs red socks per pair of white socks. For Chicago, this opportunity cost is 4/3 = 1.33 pairs of red socks per pair of white socks. This implies that in Boston 2.5 pairs of red socks will have to be given up for a pair of white socks while in Chicago only 1.33 pairs of red socks will have to be given up for a pair of white socks.
Therefore, the price of white socks in terms of red socks is 2.5 red socks in Boston and 1.33 red socks in Chicago.
Boston has an absolute advantage in the production of red socks while Chicago has an absolute advantage in the production of white socks because Boston can produce 5 red socks while Chcago can produce only 4 red socks with the available inputs. Also, Boston can produce only 2 white socks compared to 3 white socks in Chicago.
In Boston, to produce 1 red socks, 2/5 white socks are to be given up while in Chicago 3/4 white socks are to be given up. Therefore, the opportunity cost of red socks in terms of white socks is higher in Chicago than in Boston. Therefore, Boston has a comparative advantage in the production of red socks while Chicago has a comparative advantage in the production of white socks.
If the cities trade with each other, each will export the good that it has a comparative advantage in. Therefore, Boston exports red socks and Chicago exports white socks.
Trade will only occur when the the price of red socks lies between the opportunity cost of white socks in terms of red socks. As we have already found, this means that the price of white socks in terms of red socks must lie between 1.33 red socks and 2.5 red socks. Therefore, the highest price of white socks in terms of red socks to make both cities better off is 2.5 red socks and lowest price to make both cities better off is 1.33 red socks.
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