Question

In a single year, Argentina can raise 100 tons of beef or produce 1,000 boxes of tulips. In the same growing season, Venezuela can raise 50 tons of beef or produce 750 boxes of tulips. When the two countries begin trading beef for tulips, we expect the price of beef in Venezuela to_______________.
A. to remain at the autarky price.B. to be 10 boxes of tulips.C. to fall.D. to rise.

Answer 1

Answer:

C) to fall

Explanation:

The relative price of beef will fall since Argentina can produce 1 ton of beef at the same price of 10 boxes of tulips,while Venezuela can produce 1 ton of beef at the same price of 15 tons of tulips. So Venezuelan beef is 5 boxes of tulips more expensive than Argentina's. When they start to trade, Argentina will be able to sell beef to Venezuela at a cheaper price until the price of Venezuelan beef lowers to match the Argentinean price.