Assume that the comparative-cost ratios of two products—baby formula and tuna fi

Question

Assume that the comparative-cost ratios of two products—baby formula and tuna fish—are as follows in the nations of Canswicki and Tunata:

     Canswicki: 1 can baby formula 3 cans tuna fish

     Tunata: 1 can baby formula 5 cans tuna fish

a. In what product should each nation specialize?

     Canswicki should produce (Click to select)baby formulatuna, and Tunata should produce (Click to select)baby formulatuna.

b. Would the following terms of trade be acceptable to both nations?

     1 can baby formula 2 cans tuna fish: (Click to select)NoYes.

     1 can baby formula 3.5 cans tuna fish: (Click to select)YesNo.

     1 can baby formula 6 cans tuna fish: (Click to select)NoYes.

Explanation / Answer

1)

Since Tunata has a production formula of 1 can baby that is sufficient to produce 5 cans tuna fish while for Canswicki, the same formula is sufficient to produce only 3 cans tuna fish, Canswicki has comparative advantage in producing baby formula (lower opportunity cost).

Canswicki should produce baby formula and Tunata should produce tuna fish.

2)

i) Since Canswicki has comparative advantage in producing cans of baby formula and it gives up 3 cans tuna fish, it must be given at least 3 cans tuna fish for trade to occur.

1 can baby formula 2 cans tuna fish. NO

Since in that price, Canswicki can produce 3 tuna fish,so it would not trade.

ii)

Since Canswicki has comparative advantage in producing baby formula and it gives up 3 cans tuna fish, it must be given at least 3 cans tuna fish for trade to occur.

1 can baby formula 3.5 cans tuna fish Yes

Since in that price, Canswicki can produce 3 cans tuna fish,so it would trade and get more tuna fish.

iii)

Since Tunata has comparative advantage in producing tuna fish and it gives up 1 baby formula for producing 5 cans of tuna fish, it must be given 1 baby formula for at most 5 cans tuna fish for trade to occur.

1 can baby formula 6 cans tuna fish NO

Since in that price, Tunata can itself produce 5 cans tuna fish, so it would not trade.

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