If Two Countries Engage in Free Trade Following the Principles

question 33

Multiple Choice

If two countries engage in Free Trade following the principles of comparative advantage,then

• A) neither relative prices nor relative marginal costs (marginal rates of transformation-MRTs) in one country will equal those in the other country.
• B) both relative prices and MRTs will become equal in both countries.
• C) relative prices but not MRTs will become equal in both countries.
• D) MRTs but not relative prices will become equal in both countries.
• E) trade will be unrestricted, regardless of relative costs and MRTs.

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Definitions:

Production Function

An equation that describes the relationship between inputs (like labor and capital) and the quantity of output produced.

Returns to Scale

The rate at which output increases as inputs are increased proportionately, in the context of production and cost functions in economics.

Labor Hours

The total number of hours worked by employees or workers within a specific period.

Market Costs

Expenses associated with buying or selling goods and services in a market environment, including production, distribution, and selling expenses.