Assume that it takes the US 150 units of labor to produce a table and 30 units o
ID: 1150146 • Letter: A
Question
Assume that it takes the US 150 units of labor to produce a table and 30 units of labor to produce a chair.
Assume it takes the Netherlands 100 units of labor to produce a table and 10 units of labor to produce a chair.
Assume that each country has 4800 units of labor and before trade, each country splits their labor evenly between chair and table production.
Assume that when the countries decide to trade, the country specializing in table production specializes in table production only.
Assume that when the countries decide to trade, the country that specializes in chair production uses 1000 units of labor for table production and the rest (3800 units) for chair production.
Assume that when the countries trade, there are a total of 15 tables traded at a rate of 7 chairs per table.
After trade, how many tables does the US consume?
After trade, how many chairs does the US consume?
After trade, how many tables does the Netherlands consume?
After trade, how many chairs does the Netherlands consume?
Explanation / Answer
Opp cost of table in US=5unit of chair
Opp cost of table in Netherland=10 chairs
Thus US has comparative advantage in Tables and Netherland in Chairs.
Thus US produce=4800/150=32 tables and Netherland produces=1000/10=100chairs and 3800/100=38 tables
15 tables for 7chairs
Thus US consume =17 tables and 7chairs
Whereas netherland consumes=52 tables and 93chairs