Question

Australia can produce 0 tons of coal and 20 tons of steel or 100 tons of coal and 0 tons of steel, or any linear combination thereof. China can produce 0 tons of coal and 100 tons of steel or 10 tons of coal and 0 tons of steel, or any linear combination thereof. Suppose the countries are completely specializing by only producing the good for which they have the comparative advantage.

If trade between the two countries takes place, what is the maximum price at which a ton of coal would trade between these two countries?

Group of answer choices

a) 0.1 tons of steel

b) 10 tons of steel

c)20 tons of steel

d)1 ton of steel

e)0.2 tons of steel

Answer 1

Australia can produce 20 tons of steel or 100 tons of coal which indicates that the opportunity cost of producing 1 ton of steel is 5 tons of coal . China can produce 100 tons of steel or 10 tons of coal which indicates that the opportunity cost of producing 1 ton of steel is 10/100 = 0.1 tons of coal. This shows that the opportunity cost of producing 1 ton of steel is lower in China and therefore China has comparative advantage in the production of Steel.

terms of trade lie between 0.1 tons of coal to 5 tons of coal for 1 ton of steel. In terms of steel this range is from 1/5 = 0.2 tons of steel to 1/0.1 = 10 tons of steel. The maximum price at which a ton of coal would trade between these two countries is therefore 10 tons of steel

b) 10 tons of steel