1) i)Which nation has the absolute advantage in beer production? ii) Which natio
ID: 1169141 • Letter: 1
Question
1) i)Which nation has the absolute advantage in beer production? ii) Which nation has the absolute advantage in tomato production? (2 pt)
2) i) What are the relative prices of beer and tomatoes in Mexico? (2 relative prices) ii) What are the relative prices of beer and tomatoes in US? (2 relative prices) (4 pts)
3) i) Which nation has the comparative advantage in beer production? ii) Which nation has the comparative advantage in tomato production? (2 pts)
4) i) What does Mexico export? ii) What does Mexico import? iii) What does the US export? iv) What does the US import? (2pt)
5) Suppose that an entrepreneur offered the following trade prices, which would be acceptable to both the US and Mexico? (where B = beer and T = tomatoes) (2 pt) a) 1B= 4T b) 1T = 0.167B c) 1B = 0.25T
6) i) Draw the PPC of MEXICO and place TOMATOES on the VERTICAL Axis. ii) Find the slope of the PPF. iii) Interpret its meaning. (6 pts)
7) Show graphically how Mexico gains from trade. (Hint use the offer price in #5) (2 points)
Mexico US Beer 1250 2000 Tomatoes 8750 10000Explanation / Answer
(1)
US has absolute advantage in producing both tomato & beer.
(2)
In Mexico:
Relative price of beer = 8750 / 1250 = 7
Relative price of tomato = 1250 / 8750 = 0.14
In US:
Relative price of beer = 10000 / 2000 = 5
Relative price of tomato = 2000 / 10000 = 0.2
(3)
US can produce beer at a lower relative price (opportunity cost) (5 < 7), so US has comparative advantage in beer.
Mexico can produce tomato at a lower relative price (0.14 < 0.2), so Mexico has comparative advantage in tomato.
(4)
A country will specilize in and export that good in which it has comparative advantage. So:
US exports beer & imports tomato.
Mexico exports tomato & imports beer.
(5)
Trad will take place is world relative price lies between relative price in two countries. So,
For Beer:
5 < PB < 7
For Tomato:
0.14 < PT < 0.2
(i) 1B = 4T or PB = Relative price of beer in terms of tomato) = 4
This value of PB lies outside the acceptable terms of trade range, so this price is not acceptable by any country.
(ii) 1T = 0.167B, or PT = Relative price of tomato in terms of beer = 0.167
Since this value of PT lies within the defined range, this price will be acceptable to both countries.
(iii) 1B = 0.25T, or PB = 0.25
This value of PB lies outside the acceptable terms of trade range, so this price is not acceptable by any country.
NOTE: Out of 7 questions, the first 5 are answered in full.
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