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The following table describes the production possibilities of two...
The following table describes the production possibilities of two cities in the country of Baseballia:
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5. Comparative Advantage
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
NJ
Without trade, the price of a pair of white socks (in terms of red socks) in Boston is
of red socks, and in Chicago it is
of
red socks.
has an absolute advantage in the production of red socks, and
has an absolute advantage in the production of white
socks.
V
has a comparative advantage in the production of red socks, and
has a comparative advantage in the production of white
socks.
If the cities trade with each other, Boston will export
socks, and Chicago will export
V socks.
The price of white socks can be expressed in terms of red socks. The highest price at which white socks can be traded that would make both cities
better off is
of red socks per pair of white socks, and the lowest price that makes both cities better off is
of red socks per
pair of white socks.
Answer & Explanation
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