Question

Instructions We have two states: Apple State and Banana State. There are three homogeneous goods, one factor input (labor), and unit labor requirements are given in the following table. We assume that wage rate in Apple State is $3 and that in Banana State is $4. Two states agree to trade goods freely. Answer the following two questions Units of labor required per unit of output Apple State Banana State Textile 4 1 Fish 3 2 Soybean 2 3

Answer 1

1. Yes the satement is true,As the cost incurred by the Apple state for producing a unit of Soyabeen is less than that of Banana State.Also the cost incurred fo rmaking a unit of textile and fish are less in Banana state comapred to Apple state.

The calculation of the same is as follows

Particulars	Textile	Fish	Soybeen
Apple State
Unit of Labour requires	4.00	3.00	2.00
Wage rate per hour	3.00	3.00	3.00
Cost per unit	12.00	9.00	6.00
Banana State
Unit of Labour requires	1.00	2.00	3.00
Wage rate per hour	4.00	4.00	4.00
Cost per unit	4.00	8.00	12.00

2. As the cost will be less for both the state if they produce the fish internally.The ananlysis of the same is as under.

Particulars	Fish
Apple State
Unit of Labour requires	3.00
Wage rate per hour	3.00
Cost per unit	9.00
Transportation cost	2.00
Cost if transported to Banana state	11.00
Banana State
Unit of Labour requires	2.00
Wage rate per hour	4.00
Cost per unit	8.00
Transportation cost	2.00
Cost if transported to Apple State	10.00

Analysis of Fish Cost
Apple State
The Cost incurred by Apple State to produce fish	9.00
The Cost incurred by Apple State if imported from Banana state	10.00
So there will be a loss of $	-1.00
Decision should be produce the fish inside the state as it is cost effective.
Banana State
The Cost incurred by Banana State to produce fish	8.00
The Cost incurred by Banana State if imported from Apple state	11.00
So there will be a loss of $	-3.00
Decision should be produce the fish inside the state as it is cost effective.