Three countries engage in the production of flax (an agricultural product). The market for flax in each country is perfectly competitive. Producers within a country are identical, but they differ across countries. Each producer has a constant marginal cost up to a particular level of capacity. Throughout this analysis, let's assume that there is no transportation cost between the countries. The following table summarizes supply and demand information across these countries (where quantities are in units per year and prices are in dollars per unit): Country Marginal cost Total flax capacity of country. Market demand curve Country 1 $50/unit 100 units D(P) = 300 - P Country 2 $40/unit 200 units D(P) = 150 - P Country 3 $30/unit 200 units D(P) = 150 - P

Three countries engage in the production of flax (an agricultural product). The market for flax in each country is perfectly competitive. Producers within a country are identical, but they differ across countries. Each producer has a constant marginal cost up to a particular level of capacity. Throughout this analysis, let's assume that there is no transportation cost between the countries. The following table summarizes supply and demand information across these countries (where quantities are in units per year and prices are in dollars per unit): Country Marginal cost Total flax capacity of country. Market demand curve Country 1 $50/unit 100 units D(P) = 300 - P Country 2 $40/unit 200 units D(P) = 150 - P Country 3 $30/unit 200 units D(P) = 150 - P

ENGR.ECONOMIC ANALYSIS

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ISBN:9780190931919

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Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Comparative Advantage and Absolute Advantage Analysis

The theory of absolute advantage was given by Adam Smith in the year 1776.

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Three countries engage in the production of flax (an agricultural product). The market for flax in each country is perfectly competitive.
Producers within a country are identical, but they differ across countries. Each producer has a constant marginal cost up to a particular level
of capacity. Throughout this analysis, let's assume that there is no transportation cost between the countries.
The following table summarizes supply and demand information across these countries (where quantities are in units per year and prices are
in dollars per unit):
Country
Marginal cost
Total flax capacity of country
Market demand curve
Country 1
$50/unit
100 units
D(P) = 300 - P
Country 2
$40/unit
200 units
D(P) = 150 - P
Country 3
$30/unit
200 units
D(P) = 150 - P
Suppose all three countries engage in free-trade. With free-trade the price of flax will be the same in all the countries. What is the short-run
market equilibrium price and quantity of flax in each country if all three countries can engage in free trade with each other?
Price with free trade:
a. Quantity of flax in country 1 with free trade:
b. Quantity of flax in country 2 with free trade:
c. Quantity of flax in country 3 with free trade:

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