Managerial Economics

Assignment 2 (Answered below)

Questions:

1. The following table describes the production possibilities of 2 cities.

Pairs of Red Socks per Pairs of White Socks per

worker per hour worker per hour
Bangalore 3 3
Coimbatore 2 1

a. Without trade what is the price of white socks (in terms of red socks) in Bangalore?
What is the price in Coimbatore?
b. Which city has an absolute advantage in the production of each colour sock? Which
city has a comparative advantage in the production of each colour sock?
c. If the cities trade with each other, which colour sock will each export?
d. What is the range of prices at which trade can occur?

Answers:

a. Answer
In Bangalore, Can produce 3 pair of red socks for one hour per one worker, and even
the white socks productivity is same as Red socks. And the price ratio for red and
white socks 3 divided by 3 is equal to 1.
Price of one pair of white socks is equal to one pair of red socks.

In Coimbatore, One worker is given one hour and can produce 2 pair red socks and 1
pair of white socks.
1 pair of white socks = 2 pairs of red socks, Price ratio is 1 divided by 2 is equals
to 0.5 or
The price of one pair of white socks is the 2 pair of red socks.

b. Answer
Absolute advantage.
In Bangalore, Can produce 3 pair of red socks for one hour per one worker, and even
the white socks productivity is same as Red socks.
In Coimbatore, One worker is given one hour and can produce 2 pair red socks and 1
pair of white socks.
To produce 1 pair of red socks 0.5 hour (one divided by two) in Coimbatore and in
Bangalore 0.33 hour (one divided by three) which is lesser and can say Bangalore is
having absolute advantage of production of Red and white socks.
 Comparative Advantage.
For White socks, cost of producing one pair of white socks in Bangalore is one pair of
red socks and cost of producing one pair of white socks in Coimbatore is two pair of
red socks. So Bangalore is having Comparative advantage for white socks production.
For Red socks, production cost of white socks in Coimbatore is half pair of the white
socks and for red socks is 1 pair of red socks. So the Coimbatore is having
comparative advantage of production of red socks.

c. Answer
The cities which is having comparative advantage will export the goods, so the
Bangalore export the white socks and Coimbatore exports the red socks.

d. Answer.
Bangalore will export white socks for the same price of the red sock or lesser price.
And Coimbatore export red socks with the same price of white socks or less price.
And Coimbatore will import white socks for higher price of white socks or equal the
price of red socks of 2 pairs. Price which trade occur with the price of one pair of
white socks is between one pair or two pair of red socks.