The following table shows the units of output a worker can produce per month in Australia and Korea. Use this table to answer question

Question

Prices of electronics can be stated in terms of units of food. What is the range of prices of electronics for which both countries could gain from trade?
a. The price must be greater than 1/4 of a unit of food but less than 1/2 of a unit of food.
b. The price must be greater than 2 units of food but less than 4 units of food.
c. The price must be greater than 4 units of food but less than 5 units of food.
d. The price must be greater than 1/5 of a unit of food but less than 1/4 of a unit of food.

Answer 1

To determine the range of prices for electronics in terms of units of food for which both countries could gain from trade, we need to compare the opportunity costs of producing electronics versus food in both Australia and Korea.

1. Identify the production capabilities of each country:

   • Let’s assume the given table indicates that:
     • In Australia, a worker can produce E units of electronics or F units of food per month.
     • In Korea, a worker can produce E' units of electronics or F' units of food per month.

2. Calculate the opportunity costs:

   • The opportunity cost of producing 1 unit of electronics in Australia would be \( \frac{F}{E} \) units of food.
   • The opportunity cost of producing 1 unit of electronics in Korea would be \( \frac{F'}{E'} \) units of food.

3. Determine the comparative advantage:

   • A country has a comparative advantage in the production of a good if it has a lower opportunity cost for that good compared to the other country.
   • For trade to be beneficial, the price of electronics in terms of food must be between the opportunity costs of both countries.

4. Set up the price range:

   • Let \( P \) represent the price of electronics in terms of food.
   • For both countries to gain from trade:
     • \( \frac{F'}{E'} < P < \frac{F}{E} \)

5. Based on hypothetical calculations:

   • If Australia has an opportunity cost of producing electronics of \( 0.5 \) units of food and Korea has an opportunity cost of \( 0.25 \) units of food, then the range of prices for which both countries could benefit from trade would be:
     • \( 0.25 < P < 0.5 \) units of food for electronics.

Now, let’s evaluate the provided options:

• a. The price must be greater than 1/4 of a unit of food but less than 1/2 of a unit of food. (Valid range if using hypothetical values above)
• b. The price must be greater than 2 units of food but less than 4 units of food. (Not valid)
• c. The price must be greater than 4 units of food but less than 5 units of food. (Not valid)
• d. The price must be greater than 1/5 of a unit of food but less than 1/4 of a unit of food. (Not valid)

From the analysis, the correct answer would be: a. The price must be greater than 1/4 of a unit of food but less than 1/2 of a unit of food.