Question

The following table shows the amount of labor required to produce one unit of output (food...

The following table shows the amount of labor required to produce one unit of output (food or oil) in each of the two countries.

Food

Oil

Russia

4 hours

8 hours

China

6 hours

18 hours

a. True/False questions

T   F   –   The autarkic price ratio in China is 1 unit of oil = 3 units of food.

T   F   –   The autarkic price ratio in Russia is 1 unit of food = 2 units of oil.

T   F   –   Russia has an absolute advantage in both goods.

T   F   –   Russia has a comparative advantage in both goods.

T   F   –   Once the countries start trading, Russia will export food and import oil.

b. What range of terms of trade will be acceptable for both countries? Explain.

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Answer #1

1. True. In China oil requires 18 hours while food requires=6 hours which means autarky price ratio in China for oil should be 3food.

2.false. Price of food=1/2 price of oil

3. True. Russia require less labor hours for both goods which means Russia has an absolute advantage in both the goods.

4. False.

Russia opp cost of oil=2 food

China’s opp cost of oil=3 food

Thus Russia has a comparative advantage in oil and China in food

5. False. Russia will export oil and China will export food

6. Mutual beneficial term of trade. 2Food<1Oil<3 food

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