Question

Suppose that in Mexico, it takes four labor hours to produce one shirt and 12 labor hours to produce one computer. Suppose that in the United States, it takes four labor hours to produce one shirt and three labor hours to produce one computer. If both countries have 60 labor hours available, completely specialize according to comparative advantage, and trade 7.5 shirts for 7.5 computers, which of the following gives total consumption in the United States after trade?

a. 15 shirts and 20 computers

b. 7.5 shirts and 10 computers

c. 7.5 shirts and 12.5 computers

d. 7.5 shirts and 7.5 computers

Answer 1

Opportunity cost of Producing shirts in mexico=4/12=1/3=0.33

Opportunity cost of Producing shirts in US=4/3=1.33

So mexico has comparitive advantage in shirts because it has lower opportunity cost of producing shirts and US has comparitive advantage in computers.

So Mexico will only produce shirts and trade it to get computer and US will only produce computers and trade it to get shirts.

US Production of computers=60/3=20

The terms of trade or exchange rate= 7.5 shirts to 7.5 computers

So US will trade 7.5 computers and get 7.5 shirts.

After trade ,US will have shirts=7.5

Computers=20-7.5=12.5

OPTION C is correct