Question

6. Suppose that both Home and Foreign move from autarky to a free-trade regime and the trade price of product X is 0.4Y. From the Hone perspective, the trade price is than the marginal cost of product X, which isSo, the Home economy under free trade. So, the X industry must A) smaller; 0.5Y; exit B) greater; 0.5Y; overtake C) smaller; 0.25Y; exit D) greater; 0.25Y; overtake 1. Again, suppose that both Home and Foreign move from autarky to a free-trade regime and that the trade price of product. X is 0.4Y. Industry specialization must result in the globa production of units of product X and units of productY A) zero; 750 B) 750; 1000 C) 500; 800 D) 1000; 500 8. Again, suppose that both Home and Foreign move from autarky to a free-trade regime Y to Foreign, then and that the trade price of product X is 0.4Y. If Home exports 100 units of from this bilateral trade, Home's and Foreign's gains worth product X, respectively. and units of A) 50; 75 B) 75; 100 C) 50; 125 D) 75; 150 9. Again, suppose that both Home and Foreign move from autarky to a free-trade regime and that the trade price of product X is 0.4Y. If Home exports 100 units of Y to Foreign, then from this bilateral trade, Home's and Foreign's gains worth product Y, respectively. units of an A) 10; 15 B) 15; 20.5 C) 20; 37.5 D) 25; 40

Answer 1

Labour Hours per unit of output

Product	Home	Foreign
X	0.5	0.5
Y	1	2

Now determine output per hour

Product	Home	Foreign
X	2	2
Y	1	0.5

Total output with 500 Labour Hours

Product	Home	Foreign
X	1,000	1,000
Y	500	250

Now we can calculate opportunity cost

Opportunity Cost

Product	Home	Foreign
1 unit of X	0.5 unit of Y	0.25 unit of Y
1 unit of Y	2 units of X	4 units of X

Since, Home has comparative advantage in Product Y so it should produce only X while foreign should produce only X.

Output after specialization

Output with Specialization

Product	Home	Foreign	Output
X	0	1,000	1,000
Y	500	0	500

1. Foreign has comparative advantage in Product X.

2. A. 0.25 Y ; 0.5 Y

6. A. Smaller ; 0.5; exit.

7. 1000 units of X and 500 units of Y.

8. B. 75, 100

9. D. 25, 40