3. (10 marks) With each unit of resources, Country A can produce 4 cars or 600...

3. With each unit of resources, Country A can produce 4 cars or 600 microchips while Country B can produce 8 cars or 800 microchips. Suppose these two countries engage in international trade. Currently, 1 car can be exchanged for 120 microchips in the international market.

a. Find the opportunity costs of producing one car for these two countries respectively. Which country has a comparative advantage in car production?

b. Which country, A or B, should sell cars in international trade? How much would each country gain respectively from trading one car in international trade. Show your calculation.

c. Suppose, to protect the environment, the citizens in Country B will not drive any more and they won’t need to buy any cars at all. Should Country B only produce microchips? Explain.

Expert Solution

country B is more comparative advantage than country A

Thank you.

Rahul Sunny answered 1 year ago

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