Consider an economy with two producers, Sidney and Connor. Each allocates 8 hours per day between the production of chocolate and bananas. Given 8 hours of labour, Sidney can produce 80kg of chocolate or 16kg of bananas. Connor can produce either 2kg of chocolate or 4kg of bananas per hour. B) Introducing Trade i) Suppose production capacity does not change. Do we expect there to be trade between Sidney and Connor? Why or why not? ii) What are the bounds on the price of bananas (in terms of chocolate) if there is trade? In other words, what range must the price of bananas fall within? iii) Assume a price of 4. In other words, 1kg of bananas cost 4kg of chocolate. Explain why trade is likely to make both Sidney and Connor better off in this case.
Consider an economy with two producers, Sidney and Connor. Each allocates 8 hours per day between the production of chocolate and bananas. Given 8 hours of labour, Sidney can produce 80kg of chocolate or 16kg of bananas. Connor can produce either 2kg of chocolate or 4kg of bananas per hour.
B) Introducing Trade
i) Suppose production capacity does not change. Do we expect there to be trade between Sidney and Connor? Why or why not?
ii) What are the bounds on the price of bananas (in terms of chocolate) if there is trade? In other words, what range must the price of bananas fall within?
iii) Assume a price of 4. In other words, 1kg of bananas cost 4kg of chocolate. Explain why trade is likely to make both Sidney and Connor better off in this case.
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