Assume that Home and Foreign produce two goods, chocolate (c) and milk (m), and use the information in Table 1 to answer the following questions. Table 1: Home – Wc = 10 Wm = ? MPLc = 4 MPLm = ? Pc = ? Pm = 4 Foreign – Wc = ? Wm = 16 MPLc = ? MPLm = 4 Pc = 5 Pm = ? a. Suppose that markets are competitive in both countries. Find the no-trade equilibrium values of the variables in the table. b. Suppose the world relative price of chocolate in the trade equilibrium is Pc/Pm = 1. Which good will each country export? Show that each country gains from trade.

Assume that Home and Foreign produce two goods, chocolate (c) and milk (m), and use the information in Table 1 to answer the following questions.

Table 1: Home – Wc = 10 Wm = ? MPLc = 4 MPLm = ? Pc = ? Pm = 4

Foreign – Wc = ?  Wm = 16 MPLc = ? MPLm = 4 Pc = 5 Pm = ?

a. Suppose that markets are competitive in both countries. Find the no-trade equilibrium values of the variables in the table.

b. Suppose the world relative price of chocolate in the trade equilibrium is Pc/Pm = 1. Which good will each country export? Show that each country gains from trade.

 

 

Answer:

(a) Values of variables-

Home Country

Wc=10                                        Wm=?

MPLc=4                                     MPLm=?

Pc=?                                          Pm=4

Pc=2.5 (i.e.Wc/MPLc=10/4)

and Pc/Pm=MPLm/MPLc

therfore 2.5/4=MPLm/MPLc

2.5/4 = MPLm/4

therefore MPLm=2.5

thus Wm=MPLm x Pm = 4×2.5 = 10

Foreign Country

Wc=?                                         Wm= 16

MPLc= ?                                     MPLm= 4

Pc= 5                                          Pm= ?

Pm= 4 (i.e.Wm/MPLm = 16/4)

and Pc/Pm=MPLm/MPLc

5/4= 4/MPLc

MPLc = 16/5 = 3.2

thus Wc = Pc x MPLc

therefore Wc = 5×3.2 = 16

(b) Home will export chocolate as it has comparative advantage in production of chocolate (because MPLc>MPLm) and foreign will export milk (because MPLm>MPLc)

Asked on February 15, 2018 in economics.
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