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Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985

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BuyFindarrow_forward

Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985
Textbook Problem

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):

To determine

Calculate opportunity cost.

Explanation

For the calculation of price, calculation of opportunity cost is required.

Opportunity cost of white socks in Boston is calculated as,

Opportunity cost white socksBoston=Pairs of red socks produced per hourPairs of white socks produced per hour=33=1 pair of  red socks

Thus, without trade, the price of 1 pair of white socks is 1 pair of red socks in Boston

Subpart (b):

To determine

Calculate opportunity cost.

Subpart (c):

To determine

Specialization in the production.

Subpart (d):

To determine

Trade and the price of the product.

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