The following table describes the production possibilities of two cities Pairs o

Question

The following table describes the production possibilities of two cities

Pairs of Red Socks per Worker per Hour

Pairs of White Socks per Worker per Hour

Boston

3

3

Chicago

2

1

Answer the following questions and show all work:

1.) Without trade, what is the price of white socks (in terms of red socks) in Boston? What is the price in Chicago?

2.) Which city has an absolute advantage in the production of each color sock? Which city has a comparative advantage in the production of each color sock?

3.) If the cities trade with each other, which color sock will each export?

4.) What is the range of prices at which trade can occur?

5.) Determine a trade price that is beneficial for both Boston and Chicago.

6.) Discuss gains from trade at the price you propose in e.

Pairs of Red Socks per Worker per Hour

Pairs of White Socks per Worker per Hour

Boston

3

3

Chicago

2

1

Explanation / Answer

1) Price of white shock in Boston is 3/3=1 red shock

Price of white shock in Chicago is =2 red shocks

2) Boston can produce more red an white shocks than that of Chicago per hour. So Boston has an absolute advantage in each color shocks.

opportunity cost

Chicago incurs less opportunity cost to produce red shock than that of Boston so Chicago has a comparative advantage in producing red shock

Boston incurs less opportunity cost to produce white shock than that of Chicago so Boston has a comparative advantage in producing white shock

3) If they trade, Chicago will export red export and Boston will export white shock

4) The range of price of red shock 0.5<Price of red shock<1

The range of price of white shock 1<price of white shock<2

Red shock White shock Boston 1 white shock 1 red shock Chicago 0.5 white shock 2 red shock

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