Hi, this should be a simple question but for some reason I am just ridiculously confused. This is basic microeconimics, please help me with this question. You have no idea how much I appreciate this, any help is appreciated..
Assume the following:
• The United States (US) and Australia (AUS) both produce IPods and leather
cases;
• Constant opportunity costs;
• The US can produce 30 Ipods or 30 leather cases;
• AUS can produce 20 Ipods or 10 Leather cases;
• In autarky (i.e. self-sufficiency without trade) each country produces both
goods and that the optimal mix before trade for the US is 12 Ipods and 18
leather cases. For Australia the optimal mix before trade is 4 Ipods and 8
leather cases.
a)What is the opportunity cost of 1 IPod for the US? What is the opportunity
cost of 1 leather case for the US? What is the opportunity cost of 1 IPod for
AUS? What is the opportunity cost of 1 leather case for AUS?
b)Which country has a comparative advantage in IPods and which country
has a comparative advantage in leather cases?
c)What are the minimum terms of trade that each country would be willing to
accept in order to trade?
d)Assume that each country specialises in one product and that the terms of
trade is 1 leather case for 1.5 Ipods. Assume that Australia sells 15 IPods to
the US. How much does the US gain and how much does AUS gain from
trade in terms of both Ipods and leather cases?
I am just stuck on question C and D
any help appreciated, thanks so much
Assume the following:
• The United States (US) and Australia (AUS) both produce IPods and leather
cases;
• Constant opportunity costs;
• The US can produce 30 Ipods or 30 leather cases;
• AUS can produce 20 Ipods or 10 Leather cases;
• In autarky (i.e. self-sufficiency without trade) each country produces both
goods and that the optimal mix before trade for the US is 12 Ipods and 18
leather cases. For Australia the optimal mix before trade is 4 Ipods and 8
leather cases.
a)What is the opportunity cost of 1 IPod for the US? What is the opportunity
cost of 1 leather case for the US? What is the opportunity cost of 1 IPod for
AUS? What is the opportunity cost of 1 leather case for AUS?
b)Which country has a comparative advantage in IPods and which country
has a comparative advantage in leather cases?
c)What are the minimum terms of trade that each country would be willing to
accept in order to trade?
d)Assume that each country specialises in one product and that the terms of
trade is 1 leather case for 1.5 Ipods. Assume that Australia sells 15 IPods to
the US. How much does the US gain and how much does AUS gain from
trade in terms of both Ipods and leather cases?
I am just stuck on question C and D
any help appreciated, thanks so much