30 Apr Question: The question:Part F, I have provided a screenshot of the entire question The oppurtunity costs fo…
Comparative Advantage (I) (Question 1) Consider a closed economy with only two agents: Mitchell and Shreya. Suppose that Mitchell and Shreya can only produce either Oranges or Coconuts A) Explain the difference between comparative advantage and absolute advantage As part of your explanation, you should include graphs, in particular, which characteristics of the graph will tell you who has the absolute and comparative advantage in production and why Explain why Mitchell must have the comparative advantage in the production of oranges if Shreya has the comparative advantage in the production of coconuts. For this closed economy, why is the CPC equal to the PPC? Suppose that Mitchell and Shreya have decided to trade with each other let’s say Mitchell trades oranges for coconuts with Shreya. Suppose that . the opportunity cost of one orange for Mitchell is three coconuts per hour and B) C) the opportunity cost of one orange for Shreya is four coconuts per hour. Assume they work for 8 hours. What is the possible range of prices that Mitchell will trade with Shreya? Explain. As part of your explanation you must explain why the range of prices cannot exceed your stated range of prices. Why is the CPC different to the PPC if Mitchell and Shreya decide to open their economy for foreign trade with other partners? More precisely, why would the resulting CPC (after opening up for trade) be greater than the PPC? Assuming that Mitchell and Shreya have opened their economy to foreign trade with other partners, why would the CPC be maximised when the economy is producing at the outermost point of the PPC? Hint: Think about what the CPC is and how you construct it when an economy opens up for trade Following from the above, what are the range of prices that Shreya and Mitchell are willing to accept to trade in this market, assuming that they are a small open economy. Is it different to the two-person case? Explain. In your explanation you must discuss (i) what is the range of prices, (ii) compare it with the two-person case and(i) explain why there are any differences in the range of prices. (Hint: You may want to consider (D) with prices of 2 coconuts and five coconuts to help motivate your discussion.) D) E) F)
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