5. Suppose two cities, Boston and New York, only produce two goods: lobster roll

Question

5. Suppose two cities, Boston and New York, only produce two goods: lobster rolls and hot dogs. The number of lobster rolls and hot dogs that a single worker from each city can make in one hour are shown below. City Lobster Rolls Hot Dogs Boston New York (a) Without trade, what is the "price" of one lobster roll (in terms of hot dogs) in Boston? What is the price of one lobster roll in New York? (b) Which city has the absolute advantage in producing lobster rolls? Which city has the absolute advantage in producing hot dogs? (c) Which city has a comparative advantage in the production of lobster rolls? Of hot dogs? (d) If the cities trade with each other, which snack will each city export to the other? (e) What is the range of prices for which both cities will benefit from trade?

Explanation / Answer

Answer

a)

For Boston

To produce 1 lobster roll 1/6 hours are required while To produce 1 hot dog 1/4 hours are required.

Hence price of lobster roll is 4/6 times price of hot dog.

For New York

To produce 1 lobster roll 1/4 hours are required while To produce 1 hot dog 1/3 hours are required.

Hence price of lobster roll is 3/4 times price of hot dog.

b)

We can see from the above table that one hour of labor produces 6 lobster rolls in Boston but only 4 lobster rolls in New york. Thus Boston is more efficient and hence has absolute advantage in lobster rolls.

Similarly one hour of labor produces 4 hot dogs in Boston but only 3 hot dogs in New york. Thus Boston is more efficient and hence has absolute advantage in lobster rolls.

hence Boston has absolute advantage in both lobster rolls and hot dogs.

c) New York labor is 3/4 times less productive in hot dogs but 4/6 times less productive in lobster rolls than labor in Boston. New York has comparative advantage in hot dogs.(3/4 > 4/6).

Boston labor is 4/3 times more productive in hot dogs but 6/4 times more productive in lobster rolls than labor in New York. Boston has comparative advantage in lobster rolls.(6/4 > 4/3).

d) Since  Boston has comparative advantage in lobster rolls, Boston will export lobster rolls. And  New York has comparative advantage in hot dog, New York will export hot dogs.

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