Exam 1 - Practice Problems 1. Absolute Advantage vs Comparative Advantage Consid

Question

Exam 1 - Practice Problems 1. Absolute Advantage vs Comparative Advantage Consider the following productivity data for Kate and Pippa. A fixed amount of labor hours can produce: Hats 15 10 resses 3040 (a) Who has the absolute advantage ip the production of hats? Who has the absolute advantage Kate Pippa in the production of dresses? Briefly explain your answers. (b) Who has the tive advantage in the production of hats? Who has the comparative advantage in the production of dresses? Briefly explain your answers. (e) If Kate and Pippa trade in these two goods, who would export hats in exchange for dresses and why? (d) Who would benefit from trade? Why? (e) What are the terms of trade for both goods? Give an example of Phat at which Pippa would refuse to trade. Briefly explain why she would not trade at that price.

Explanation / Answer

a. Pippa has in dresses and Kare has in dresses. As it is very clear from the data given that same number of labour are working but productivity for different goods is different.

b. Hence it is clear that Kate has comparative advantage for hats and Pippa has for dresses. The reason is opportunity cost. Kate has less O.C for hats and Pippa for dresses.

c. Country should specialize in a good in which it has comparative advantge. Hene Kate will export hats and Pippa will export dresses.

d.Pippa benefits more becuase if each country specilizes then terms of trade arre in favour of Pippa, after specilization Kate will make 30 hats and Peppa 80 dresses. Even if Pippa accepts 2 dresses for one hat, they are better off.

e. If Kate offers one hat for 3 dresses then, Pippa will refuse to trade as it makes them worse off.

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