Consider the following hypothetical data for two hypothetical countries, Tyrol and Trentino. Figures are in tons of output per unit of input. Assume constant opportunity costs. Apples Potatoes Tyrol 1 10 Trentino 5 20 A. Can you determine precisely the equilibrium international price ratio after trade is opened up? B. Will each country specialize completely or partially in the production of its export good? C. Pick a feasible international price ratio and quantify the gains from trade for each country.

Consider the following hypothetical data for two hypothetical countries, Tyrol and Trentino. Figures are in tons of output per unit of input. Assume constant opportunity costs.

Apples Potatoes
Tyrol 1 10
Trentino 5 20

A. Can you determine precisely the equilibrium international price ratio after trade is opened up?

B. Will each country specialize completely or partially in the production of its export good?

C. Pick a feasible international price ratio and quantify the gains from trade for each country.

 

 

 

Answer:

Answer A.

Let’s assume that apples equilibrium price is x and potatoes is y.

when economy is opened up then trentino will send some of it’s product to tyrol because due to less quantity produced in tyrol prices will be higher there.

so at eqiulibrium level qauntity in both countries will be same because economy is opened- 3 apples and 15 potatoes in both country.

So ratio will be 3/15=1/5.

Answer B.

Only one country specialises in the production of goods because per unit cost for that country is quite less than other one.Country tyrol must have to specialize partly to remain in the competition.

Answer C.

Gains here will be 5 times for trentino on the unit cost of production than tyrol for apple and 2 times that for the potaoes and for other country there is benefit as well because as the quantity will be increased the prices will fall and more consumers can buy the items.

suppose ratio is 1/5.

then gains for the tyrol is 2 more apples+5 more potaoes

gain for trentino is more price on apples and potaoes than it used to be.

Asked on February 14, 2018 in economics.
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