Question

2.    Costs are in hours/unit output. PLEASE SHOW ALL WORK/HOW YOU GOT YOUR ANSWERS.

Table 2	Watches	Rings
U.S.	4	2
U.K.	2	1

a.    In which good does the U.S. and the U.K. have an absolute advantage? How can you tell?

                                U.S. ____________________                     U.K. ____________________    

b.    Fill in the opportunity cost of producing watches and rings in each country?

        U.S.                Watches__________ Rings___________              U.K.       Watches___________ Rings___________

c.     In which good does the U.S. and the U.K. have a comparative advantage?

                                U.S. ____________________                     U.K. ____________________    

d.    Find the price of rings in terms of watches (P_R= #W/R) for both the U.S. and the U.K. in the absence of trade.

       

                                U.S. ____________________                     U.K. ____________________    

e. Express the price limits for mutually advantageous trade. What does this result indicate?

Answer 1

A) WATCHES IS THE ABSOLUTE ADVANTAGE , AS PER THE ABSOLUTE ADVANTAGE THEORY THE COMPETITOR WHO IS HAVING A ABILITY TO PRODUCE MORE THAN THE OTHER COMPETITOR, HERE IN THE ABOVE TABLE IT SHOWS THAT USA COUNTRY IS HAVING A ADVANTAGE OF PRODUCING THE QUANTITY MORE THAN UK.

B)OPPORTUNITY COST = ALTERNATIVE NOT CHOSEN- ALTERNATIVE CHOSEN.

FOR USA: FOR ONE WATCH FOR ONE RING

WATCHES OPPORTUNITY COST  = 4/4 RING OPPORTUNITY COST = 2/2

= 1 =1

RINGS OPPORTUNITY COST = 2/4 WATCHES OPPORTUNITY COST= 4/2

= 1/2 = 0.5 =2

HERE THE OPPORTUNITY COST IS THAT FOR 1 WATCHES = 0.5 RINGS & 1 RING = 2 WATCHES

FOR UK : FOR ONE WATCH:

WATCHES OPPORTUNITY COST = 2/2

= 1

RINGS OPPORTUNITY COST = 1/2 = 0.5

FOR ONE RING:

WATCHES OPPORTUNITY COST =2/1 RING OPPORTUNITY COST = 1/1

= 2 = 1

  

HERE IN THIS CASE UK OPPORTUNITY COST FOR 1 WATCH = 0.5 OF RING & FOR 1 RING = 2 WATCHES

C) COMPARATIVE ADVANTAGE IN USA & UK IS :

HERE IN CALCULATION OF THE OPPORTUNITY COST FOR COUNTRIES THE COMPARATIVE ADVANTAGE ASCERTANING IS TO BE DONE , A COMPARATIVE ADVANTAGE MEANS A LOWEST OPPORTUNITY COST AVAILABLE FOR A COUNTRY TO PRODUCE IN THIS CASE BOTH COUNTRIES SHOW EQUAL AMOUNT OF OPPORTUNITY COST SO THEY CA PRODUCE EITHER OF THE GOODS, OR ELSE UK CAN PRODUCE WATCHES FOR RINGS AND US RINGS FOR WATCHES OR VICEVERSA.

D) ON ASSUMING THE FOLLOWING THINGS

1. THE PEOPLE ARE MOBILE IN NATURE
2. PROFIT IS MOTTO FOR THE LABOR.

GIVEN, Pr =W/R

HERE FOR USA ,

PRICE OF RINGS (Pr) * UNITS = PRICE OF WATCHES (Pw)* UNITS

Pr * 2 = Pw * 4

Pr/Pw = 4/2

Pr = 2Pw.

HERE THE PRICE OF RINGS IS TWICE THE PRICE OF WATCHES.

HERE FOR UK,

PRICE OF RINGS (Pr) * UNITS = PRICE OF WATCHES (Pw)* UNITS

Pr * 1 = Pw * 2

Pr/Pw = 1/2

Pr = 1/2 Pw.

HERE THE PRICE OF RINGS IS HALF OF PRICE OF WATCHES.