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Answer #1

Without trade, the price of a pair of white socks in terms of red socks in Boston will be derived from the table as 5/2 .i.e.2.5 and in Chicago will be 4/3 or 1.33. Hence, Chicago produces one pair of white socks at a lower opportunity cost than Boston implies Chicago has a comparative advantage in the production of white socks and by similar reasoning, Boston has a comparative advantage in the production of red socks.

For absolute advantage, Boston produces more red socks as 5>4 hence it has an absolute advantage in red socks and Chicago produces more white socks 3>2 then Chicago has an absolute advantage in white socks.

If the cities trade, they will trade in the goods in which each has comparative advantage.i.e.chicago will export white socks and Boston will export red socks.

The highest price for white socks in terms of red socks is 2.5 pair of red socks and lowest price is 1.33 pair of red socks.

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