The following table describes the production possibilities o

The following table describes the production possibilities of two cities in the country of Baseballia:

       Pairs of Red Socks Pairs of White Socks                     per Worker per Hour per Worker per Hour

Boston                          3                                                                                                    3

Chicago                        2                                                                                                    1

a. Without trade, what is the price of white socks (in terms of red socks) in Boston? What is the price in Chicago?

b. Which city has an absolute advantage in the production of each color sock? Which city has a comparative advantage in the production of each color sock?

Solution

Price in each counry will be labour hours involved * wage rate per hour.

b) Boston hasabsolute advantage in production of both goods. Its output for both goods is more than output in Chicago.

Chicago has comparative advantage in production of red socks. Difference in production of red scoks is less than differenc ein production fo white socks of two countries.