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1. Consider the following hypothetical data for two hypothetical countries, Tyrol and Trentino. Figures are in...

1. Consider the following hypothetical data for two hypothetical countries, Tyrol and Trentino. Figures are in tons of output per unit of input. Assume constant opportunity costs.

Apples/Potatoes:

Tyrol 1 10

Trentino 5 20

A. Pick a feasible international price ratio of apples relative to potatoes (PA/PP) of 3. Quantify the gains from trade for each country.

B. How will the result be different if the relative price is 1?

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Answer #1

Answer-A)

Gains here will be 5 times for trentino on the unit cost of production than tyrol for apple and 2 times that for the potaoes and for other country there is benefit as well because as the quantity will be increased the prices will fall and more consumers can buy the items.

suppose ratio is 1/5.

then gains for the tyrol is 2 more apples+5 more potaoes

gain for trentino is more price on apples and potaoes than it used to be.

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