Assume that the comparative-cost ratios of two products—baby formula and tuna fi
ID: 1205419 • Letter: A
Question
Assume that the comparative-cost ratios of two products—baby formula and tuna fish—are as follows in the nations of Canswicki and Tunata:
Canswicki: 1 can baby formula 3 cans tuna fish
Tunata: 1 can baby formula 5 cans tuna fish
a. In what product should each nation specialize?
Canswicki should produce (Click to select)tunababy formula, and Tunata should produce (Click to select)baby formulatuna.
b. Would the following terms of trade be acceptable to both nations?
1 can baby formula 2 cans tuna fish: (Click to select)NoYes.
1 can baby formula 3.5 cans tuna fish: (Click to select)YesNo.
1 can baby formula 6 cans tuna fish: (Click to select)NoYes.
Explanation / Answer
1)Tunata should specialise in Tuna fish production while Canswicki should specialise in baby formula because the opportunity cost of producing baby formula in Canswicki is less than in Tunata.The opportunity cost of producing tuna in Canswicki is greater at 1/2 can of formula per can of tuna than in Tunata,where each can of tuna means giving up only 1/4 can of of formula.
2)1.yes,both countries would accept these terms of trade because they are both better off after the trade.
2. yes, By giving up 3.5 cans of tuna to Caswiki, Tunata can get 1 baby formula can from Canswiki. This is better than producing 1 can babyformula in Tunata by giving up resources that could have produced 6 cans of Tuna fish. So Tunata is happy with this exchange rate.
Canswiki is also happy. It gets 3.5 cans of Tuna fish from Tunata by giving 1 canb baby formula as against it own domestic cost of producing 3.5 cans of Tuna fish being loss of 3.5 cans of baby formula.
3.Tunata would not accept these terms of trade,because the price of a imported baby formula is higher than the price of domestically - produced formula.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.