3. (Comparative Advantage) The following table shows tion capabilities for Austr

Question

3. (Comparative Advantage) The following table shows tion capabilities for Austria and Russia. Production units Containers of Snowboards 20/unit 10/unit Cases of wine 3/unit 8/unit Austria (1,000 units) Russia (1,000 units) When no trade takes place, Austria allocates 600 production units to producing snowboards and 400 production units to producing wine; Russia allocates 200 production units to producing snowboards and 800 production units to producing wine. (a) Construct a table to show the production and consumption of Austria and Russia without trade. (b) With complete specialization and output maximization for each product, which country should produce snowboards only? (c) With complete specialization, output maximization for each product, and international trade being no worse than no trade, if Russia exports X cases of wine to Austria with the price of P snowboards/wine, find the range X an (d) With complete specialization, output maximization for each product, and international trade being no worse than no trade, if Russia e how many containers of snowboards and cases of wine will be available for consumption in Austria? d P 1.400 cases of wine to Austria wi th the price of 5 snowboards/wine

Explanation / Answer

b) Relative advantage:

Austria/Russia for Snowboards = 20/10 = 2

For wine = 3/8 = 0.375

Austria should produce snowboards only

c) The case of international trade:

When international trade is better off, the following conditions must be met.

PX 2,000; (20,000-PX) 12,000;

X 1200; (8,000-X) 6,400

Or, 8,000 PX 2,000 and 1,600 X 1200

Or, 8,000 PX 2,000 and X=1,200 to 1,600

P is between 80/12 and 20/16

or, 20/3 and 10/8

d) P = 5 snowboards/wine

Or, 20,000 - 5 x [(12+16)/2] = 13,000 containers of snowboards

and 1,400 cases of wine.

Toys Wine Austria (20 x 1000 units) 20,000-PX X Russia PX 8,000-X

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