Question

Inputs per unit of strawberry output	Inputs per unit of curtain output
Birdy Island	60	80
Ducky Island	40	40

If the two countries open up to free trade, what would be the possible international price level?

		0.50 C/S
		0.90 S/C
		0.90 C/S
		0.50 S/C

Answer 1

The correct answer to this question is 0.50C/S.

As per the given scenario, Birdy Island has a comparative advantage in the production of Curtain and Ducky Island have a comparative advantage in the production of strawberry.

The trade will happen as long as Ducky Island is giving 2 strawberries for 1 curtain. The world price will be 0.50 curtain/strawberry. The Island will only trade if Birdy is receiving 80 strawberries (more than 60) in exchange for 80 curtains, for producing 80 strawberries Ducky has to put twice much input.