Pairs of Red Socks per Worker per Hour (RS) Pairs of White Socks per Worker per Hour (WS)

Pairs of Red Socks per Worker per Hour (RS) Pairs of White Socks per Worker per Hour (WS)

Manchester 3 3

Arsenal 2 1

The above table describes the Production Possibility Frontier (PPF) of two cities in the country of footballia.

1. Without trade, what is the price of white socks in terms of red socks in Manchester and in Arsenal?

2. 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?

3. If the cities trade with each other, which color sock will each export?

4. Find the PPF equation for each city? Graph the PPF curve for each city separately. Measure WS along the horizontal axis? Label you graphs and show all critical points. 5. Does the combination (RS = 3 and WS = 0) efficient for Manchester or Arsenal? Explain

Hint:

 Comparative Advantage: The ability to produce a good at a lower opportunity cost than another producer.

 Absolute Advantage: The ability to produce a good using fewer inputs than another producer.  People/countries will specialize in producing the good for which they have a comparative advantage. The gains from trade are based on comparative advantage, not absolute advantage.