Question

Question 1

In North and South Regland, the only two goods that can be produced are ice cream and televisions. The table below shows the hourly output of each worker in the two countries.

Hourly output per worker	Ice Cream	Televisions
North	3	1
South	4	2

Part A) Which country has absolute advantage in ice cream? In televisions? Which country has comparative advantage in ice cream? In televisions?

Part B) Suppose the two countries mutually agree on a price of televisions, in order to carry out trade. What is the highest price of televisions that the two countries can agree on? The lowest?

Part C) Which country benefits from a low price of televisions?

Answer 1

a)

South Regland has an absolute advantage in both ice cream and televisions.

(It can produce more of both goods with the same amount of resources)

Opportunity cost of producing 1 television (North) = 3 ice creams

Opportunity cost of producing 1 television (South) = 4/2 = 2 ice creams

South Regland has a comparative advantage in production of televisions (lower opportunity cost in terms of ice creams) while North Regland has a comparative advantage in production of ice creams.

b)

Highest price of 1 television = 3 ice creams

Lowest price of 1 television = 2 ice creams

c)

North Regland would benefit from a low price of television (because it has a higher opportunity cost when producing televisions)