Brief Principles of Macroeconomics...
Brief Principles of Macroeconomics...
The following table describes the production possibilities of two cities in the country of Baseballia:
| Pairs of Red Socks per Worker per Hour | Pairs of White Socks per Worker per Hour | |
| Boston | 3 | 3 |
| Chicago | 2 | 1 |
a. Without trade, what is the price of white socks (in terms of red socks) in Boston? What is the price in Chicago?
b. 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?
c. If the cities trade with each other, which color sock will each export?
d. What is the range of prices at which trade can occur?
Subpart (a):
Calculate opportunity cost.
For the calculation of price, calculation of opportunity cost is required.
Opportunity cost of white socks in Boston is calculated as,
Thus, without trade, the price of 1 pair of white socks is 1 pair of red socks in Boston
Subpart (b):
Calculate opportunity cost.
Subpart (c):
Specialization in the production.
Subpart (d):
Trade and the price of the product.
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