Question

Pairs of Red Socks per Worker per Hour (RS) Pairs of White Socks per Worker per Hour (WS)

Manchester 3 3

Arsenal 2 1

The above table describes the Production Possibility Frontier (PPF) of two cities in the country of footballia.

1. Without trade, what is the price of white socks in terms of red socks in Manchester and in Arsenal?

2. Which city has an absolute advantage in the production of each color sock? Which city has a comparative advantage in the production of each color sock?

3. If the cities trade with each other, which color sock will each export?

4. Find the PPF equation for each city? Graph the PPF curve for each city separately. Measure WS along the horizontal axis? Label you graphs and show all critical points. 5. Does the combination (RS = 3 and WS = 0) efficient for Manchester or Arsenal? Explain

Hint:

 Comparative Advantage: The ability to produce a good at a lower opportunity cost than another producer.

 Absolute Advantage: The ability to produce a good using fewer inputs than another producer.  People/countries will specialize in producing the good for which they have a comparative advantage. The gains from trade are based on comparative advantage, not absolute advantage.

Answer 1

Answer:   

	Pairs of Red Socks per Worker per Hour (RS)	Pairs of White Socks per Worker per Hour (WS)
Manchester	3	3
Arsenal	2	1

1). In Manchester - Suppose price of red socks = P_R

and Price of White socks = P_W

The Quantity produced per worker per hour for color = Q_R and Q_W respectively

SO the P_R /P_W = Q_W / Q_R

=> P_R /P_W  = 3/3 ------------------------ from the table above.

=> P_W = P_R

Similarly in Arsenal:

P_R /P_W = Q_W / Q_R

P_R /P_W = 1/2

=> P_W = 2P_R

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2). Absolute Advantage:

To produce one pair of Red socks Manchester needs = 1/3 worker hour

while in Arsenal one pair of Red socks = 1/2 worker hour

Similarly, To produce one pair of White socks Manchester needs = 1/3 worker hour

While Arsenal, To produce one pair of White socks needs = 1 worker hour

From the above data we can see that for both color socks Manchester has the Absolute Advantage, over Arsenal as it is taking lesser time to produce single items.

For comparative advantage, if we refer the first part of answer, if manchester produces the red socks then it has the opportunity cost of 1 pair of white socks, and similarly for white socks:

as P_W = P_R for Manchester

If we look at Arsenal, then P_W = 2P_R

For producing a pair of white socks, it will have to give up 2 pairs of red socks, the opportunity cost is higher.

While for producing red socks it will have to give up only 1/2 pair of white socks.

In this case we can say that Arsenal has a comparative advantage in producing Red color socks while Manchester has a comparative advantage in producing White socks.

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3).  If both cities opened up to trade, each city will specialize in the production of the good in whose production it has a comparative advantage, and will export that same good. Thus Manchester will export white socks and Arsenal will export red socks.

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4). The PPF graph can be represented as below:

PPF equation for Manchester

Q_w = 6 - Q_R

For Arsenal

Q_w = 3 - Q_R

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As per guidelines 4 subparts are done.