Principles of Microeconomics
7th Edition
ISBN: 9781305156050
Author: N. Gregory Mankiw
Publisher: Cengage Learning
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Chapter 3, Problem 6PA
Subpart (a):
To determine
Calculate opportunity cost .
Subpart (b):
To determine
Calculate opportunity cost.
Subpart (c):
To determine
Specialization in the production.
Subpart (d):
To determine
Trade and the price of the product.
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The following table describes the production possibilities of two cities in the country of Baseballia:
Pairs of Red Socks per Worker per Hour
Pairs of White Socks per Worker per Hour
Boston
3
3
Chicago
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1
Without trade, what is the price of white socks (in terms of red socks) in Boston? What is the price in Chicago?
Which city has an absolute advantage in the production of each color sock? Which city has a comparative advantage in the production of each color sock?
If the cities trade with each other, which color sock will each export?
What is the range of prices at which mutually beneficial trade can occur?
David Ricardo, the British political economist, used the example of two commodities—wine and cloth—produced by England and Portugal to explain trade. The following table shows the number of labor hours it would take England and Portugal to produce one unit each of wine and cloth:
(see table attatched)
Portugal can produce both wine and cloth using fewer labor hours than England uses. A group of mercantilists (who believe that nations build their wealth by exporting more than they import) suggest that Portugal has nothing to gain from trading with England. Would you agree? Explain your answer.
An average worker in Brazil can produce an ounce of soybeans in 20 minutes and an ounce of coffee in 60 minutes, while an average worker in Peru can produce an ounce of soybeans in 50 minutes and an ounce of coffee in 75 minutes.
Who has the absolute advantage in coffee? Explain.
Who has the comparative advantage in coffee? Explain.
If the two countries specialize and trade with each other, who will import coffee? Explain.
Assume that the two countries trade and that the country importing coffee trades 2 ounces of soybeans for 1 ounce of coffee. Explain why both countries will benefit from this trade.
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