and Mexico. (The two countries 4. Consider the following information on labor re
ID: 1164109 • Letter: A
Question
and Mexico. (The two countries 4. Consider the following information on labor requirements in the US only trade with one another.) Labor required to produce: 1 bushel of wheat US Mexico 5 hours 4 hours 15 hours 10 hours 1 bushel of corn (maize) ch country has the absölute advantage in producing wheat? In corn? Briefly explain. a. b. Which country has the comparative advantage in producing wheat? In corn? Briefly explain. c. Without trade, what is the price of a bushel of wheat (in terms of bushels of com) in the US? d. Without trade, what is the price of a bushel of wheat (in terms of bushels of com) in Mexico? e. The two countries now open to trade. Suppose that you start out with 1 bushel of corn in the Mexico. Describe a round-trip arbitrage that will allow you to profit from the price difference between the two markets. Be sure to explain how it will work. f. What will be the international price of a bushel of wheat (in terms of bushels of corn) after trade opens between the two countries? (Give the range of possible values.)Explanation / Answer
Answer
a)
To produce 1 brushel of wheat 5 hours are required in US while 15 hours are required in Mexico.
Hence US has absolute advantage over Mexico as it can produce wheat at lesser time than Mexico
b)
We can make a new table that has same characterstics as above table
Table
The United States has an absolute advantage in both wheat and corn with respect to the Mexico, but since its absolute advantage is greater in wheat (3:1) than in cloth (2.25:1), the United States has a comparative advantage in wheat.
c)
For United States
To produce 1 brushel of wheat 5 hours are required while To produce 1 brushel of corn 4 hours are required.
Hence price of bushel of wheat is 5/4 times bushel of corn
d)
For Mexico
To produce 1 brushel of wheat 15 hours are required while To produce 1 brushel of corn 10 hours are required.
Hence price of bushel of wheat is 15/10 = 3/2 times bushel of corn.
US Mexico brushel of wheat per hour 1/5 1/15 brushel of corn per hour 1/4 1/10Related Questions
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