Hi k9queen!
These are the answers to your questions.
Question 2:
a) Throughout the answer to this question I keep referring to 1 white
sock or 1 red sock, etc. Each "sock" in my answer should be
interpreted as a "pair of socks". I use "sock" to meaning "unit of the
good": here the good is "a pair of socks". In order to answer this and
the subsequent questions, it's convenient to rewrite the table you
provide. Thus, the following shows how many hours are required in each
city to produce either 1 red or 1 white sock:
Hours to make 1 red Hours to make 1 white
Boston 1/3 1/3
Chicago 1/2 1
The way in which I arrived to this table is easy: for example, red
socks in Boston are produced at a rate of 3 per hour. So 1 sock takes
one third of an hour, and so on.
So, what is the price of white socks in terms of red socks in Boston?
The reasoning is the following: making one red sock in Boston takes
1/3 of an hour. Making one white sock also takes 1/3 of an hour. Thus,
in order to produce 1 white sock, a worker must spend 1/3 of an hour.
In that same time, it could have produced exactly one white sock.
Thus, in Boston, the price of 1 white sock is 1 red sock.
Things are different in Chicago. A white sock takes 1 hour to be
produced. In the same amount of time, 2 red socks could be produced
(because each demands 1/2 hour). Thus, in Chicago, the price of 1
white sock is 2 red socks.
2) "A country has an absolute advantage over it trading partners if it
is able to produce more of a good or service with the same amount of
resources or the same amount of a good or service with fewer
resources"
Comparative and Absolute Advantage
http://www.bized.ac.uk/virtual/dc/trade/theory/th2.htm
In this case, it's clear that Boston has an absolute advantage in both
white and red socks. It has an absolute advantage in the production of
white socks because 1 white sock takes 1/3 of an hour to produce,
while in Chicago it takes 1 hour. It also has an absolute advantage in
the production of red socks because it takes 1/3 of an hour to produce
one in Boston, while it takes 1/2 an hour to do it in Chicago.
Quote from the same link: "A country has a comparative advantage in
the production of a good or service that it produces at a lower
opportunity cost than its trading partners."
So let's see who has a comparative advantage in the production of red
socks. In Boston, the opportunity cost of producing 1 red sock is 1
white sock (both take 1/3 of an hour). In Chicago, the opportunity
cost of 1 red sock is 1/2 white sock (because making 1 red sock takes
1/2 hour, while in the same time, only 1/2 white sock could be
produced). Thus, the opportunity cost of producing 1 red sock is lower
in Chicago than in Boston, in the sense that it costs less white socks
in Chicago than in Boston to produce 1 red sock.
A similar argument leads to the conclusion that Boston has a
comparative advantage in the production of white socks: in Boston, the
opportunity cost of 1 white sock is 1 red sock; while in Chicago, the
opportunity cost of 1 white sock is 2 red socks.
In these 2-good examples, it can be shown that it is (almost) always
the case that each country has a comparative advantage in the
production of one good, and the other country has a comprative
advantage in the production of the other one.
c) Clearly, each country should export the good in which it has a
comparative advnatage. That is, each country should export the good
that can be produced at the lower opportunity cost. If each country
specializes in the good they each can produce cheaper, then sum of the
production between the countries will be higher, so the "cake" to be
divided will be larger. In this case, Boston should export white
socks; while Chicago should export red socks.
d) We know that Boston will export white socks in exchange for red
socks. Up to how many white socks is it willing to pay for 1 red sock?
We saw before the the oportunity cost in Boston of 1 red sock is 1
white sock. Therefore, Boston will not pay more than 1 white sock for
1 red sock. If the price were higher, it would be best for this city
to produce red socks rather than importing them. So the upper bound
for the price of 1 red sock is 1 white sock, otherwise there will not
be trade. What's the lower bound? In Chicago, producing each red sock
it will export costs 1/2 white sock. Therefore, Chicago will not
accept less than 1/2 white sock for each red sock it sells; otherwise
the price it recieves is less than the cost. Therefore, 1 red sock
will be traded for no more than 1 white sock (otherwise Boston will
not go into the trade) and no less than 1/2 white sock (otherwise
Chicago will not go into the trade).
Using the same reasoning, we find that 1 white sock can't be sold for
more than 2 red socks (otherwise Chicago, the buyer of white socks,
will find it more convenient to produce white socks rather than import
them) and can't be sold for less than 1 red sock (otherwise Boston
will receive less than the cost to produce white socks).
This question also shows another reason why each country should export
the good each con produce at the lower opportunity cost. What would
happen if Chicago exported white socks? Since the cost in Chicago of 1
white sock is 2 red socks, Chicago wouldn't be willing to accept less
than 2 red socks from Boston for each white sock. On the other hand,
Boston would not be willing to pay more than 1 red sock for each white
sock (otherwise they would be produced in Boston rather than bought).
Therefore, since Boston is willing to pay less than what Chicago is
willing to accept, no trade would occur.
Question 1:
a) This question can be answered using the same techinques as the
previous one. Let's build the table. It shows, as before, how many
hours each of the roommates take to make either good:
Hours to brew 1 Gallon of beer Hours to bake 1 Pizza
Pat 4 2
Kris 6 4
So, what is each roommate's opportunity cost of making a pizza? In the
same amount of time it takes him to make a pizza, Pat can brew 1/2
beer. Thus Pat's opportunity cost of making 1 pizza is 1/2 beer. On
hte other hand, Kris can brew 2/3 beer in the same time it takes him
to make 1 pizza. Thus his opportunity cost is 2/3 beer. Therefore, Pat
has a comparative advantage in the production of pizza. A similar
reasoning shows that Kris has a comparative advantage in the
production of beer.
b) As in the other question, since it's cheaper for Pat to make a
pizza, it will be Pat the one who trades away (gives) pizza in
exchange for beer.
c) This is the same as question d) before. Pat will not accept less
than 1/2 beer for the pizza he makes, because that's what it costs him
to make 1 pizza. Kris, on the other hand, will not be willing to pay
more than 2/3 beer for 1 pizza. The reasons are exactly the same as
before. Therefore, the range of prices for 1 pizza will be between 1/2
and 2/3 gallons of beer.
Graphs with the production possibility frontier for both questions can
be found at http://www.angelfire.com/alt/elmarto/ , but this answer
should be clear enough without them. For more information on this
subject, check:
A Ricardian Numerical Example
http://internationalecon.com/v1.0/ch40/40c130.html
Google search strategy
"comparative advantage" "in terms" "absolute advantage"
://www.google.com/search?hl=en&lr=&ie=UTF-8&oe=UTF-8&q=%22comparative+advantage%22+%22in+terms%22+%22absolute+advantage%22
I hope this helps! If you have any doubts regarding my answer, please
don't hesitate to request a clarification. Otherwise I await your
rating and final comments.
Best wishes!
elmartp |
