Question

12. Probiems and Applications Q6 The table the Boston Chicago Without trade, the price of a pair of white socks (in terms of red socks) in Boston is red socks. of red socks, and in Chicago it is ▼of has an absolute advantage in the production of red socks, and has an absolute advantage in the production of white socks. has a comparative advantage in the production of red socks, and Y has a comparative advantage in the production of white socks. socks. If the cities trade with each other, Chicago will export socks, and Boston will export- The price of white socks can be expressed in terms of red socks. The highest price at which white socks can be traded that would make both cities better off is per pair of white socks. lof red socks of red socks per pair of white socks, and the lowest price that makes both cities better off is

Answer 1

Question 1)

(a) Without trade,

Price of white socks in Boston = 3/3 = 1 pair of red socks

Price of white socks in Chicago = 2/1 = 2 pairs of red socks

(b) In one hour, Boston can produce higher number of white socks (3 > 1) and Boston can produce higher number of red socks (3 > 2). Therefore,

Boston has absolute advantage in red socks and Boston has absolute advantage in white socks.

(c) Relative price of white socks is lower in Boston than in Chicago, therefore relative price of red socks will be lower in Chicago than in Boston. So,

Chicago has comparative advantage in red socks and Boston has comparative advantage in white socks.

(d) As per the law of comparative advantage, a country exports the good in which it has comparative advantage. Therefore

Chicago will export red socks and Boston will export white socks.

(d) Trade is mutually beneficial if terms of trade (relative price after trade) lies in between the relative prices in each trading partner. So,

Highest price is 2 pairs of red socks and lowest price is 1 pair of red socks.