1. TRADING CITIES: COMPARATIVE ADVANTAGE AND TRADE 1) The output per hour in the

Question

1. TRADING CITIES: COMPARATIVE ADVANTAGE AND TRADE 1) The output per hour in the North is & shirts and 4 loaves of bread; the output per hour in the South is 4 loaves of bread and 1 shirt; 2) To specialize, a North household switches 1 hour from bread to shirts, and a South household switches I hours from shirts to bread: 3) The exchange rate is 2 shirts for 4 loaves 4) A transaction takes I hour to execute. Table 1 Output per Hour and Opportunity Cost South Bread Shirt North Bread Shirt Output per Hour Opportunity cost fing one unit of the itemOLL Table 2 Specialization and Gains from Trade North Bread Shirt South Bread Shirt Change in production from specialization Exchange 2 shirts for 4 loaves no t The questions are the following: a. What's the opportunity cost of a bread in terms of shirts, and what's the opportunity cost of a shirt in terms of bread respectively for the North and South? What's the change in production from specialization and exchange? Fill in your answers in the squared bracket [ 1 in Table 1 and Table 2 (no need to show your work here). (24 points)

Explanation / Answer

Opportnunity costs for North and south are (Before specilization)

For North

For South

After specilization total output : For North

For South

following answers b part in the question above:2 shirts for 4 loaves is the exchange rate:

Hence both countries are better off as

North now has:

7 Breads and 10 Shirts

South now has:

4 Breads and 2 Shirts.

Bread Shirts 8/4=2 4/8=1/2

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