Posted by G on Friday, May 16, 2008 at 10:55am.
I am getting thrown off by absolute advantage:
Red Socks per worker per hour 3
White Socks per worker per hour 3
Red Socks per worker per hour 2
White Socks per worker per hour 1
A) Without trade, what is the price of white socks (in terms of red socks) in Boston? What is the price in Chicago?
This is my answer to this question:
3 White Socks=3 Red Socks
1 White Sock=1 Red Sock
1 White sock=2 Red Socks
.5 White Sock=1 Red Sock
The next question is what is what I am having trouble with:
B)Which city has an absolute advantage in the production of each color sock? Whick city has a comparative advantage it ehe productions of each color sock?
This is my answer:
Boston has the absolute advantage in the production of white socks. Neither city has an absolute advantage in the production of red socks.
Chicago has a comparative advantage in the production of white and red socks.
I am not sure I am answering correctly.
- Economics - economyst, Friday, May 16, 2008 at 1:12pm
Boston has an absolute advantage in producing both red socks and white socks. For red, a worker in Boston can produce 3 for every 2 a Chicago worker can (3>2). For white, a Boston worker can produce 3 for every 1 a Chicago worker can (3>1).
Chicago has a comparitive advantage in producing red socks only. In Chicago, the opportunity cost to produce one red is .5 white while in Boston the opportunity cost to produce 1 red is 1 white.
So, Boston has a compartitive advantage in producing white socks. In Boston, the opportunity cost to produce 1 white is 1 red. While in Chicago, the opportunity cost of producing 1 white is 2 reds.
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