-Refer to Above Figure

question 28

Essay

-Refer to above figure. Albania refused to engage in international trade for ideological reasons. To maximize its economic welfare it would choose to produce at which point in the diagram above? Suppose the P_A/P_B at point a was equal to 1.
Given this information, in which good (A or B) does Albania enjoy a comparative advantage?
Now that the Cold War is over, Albania is interested in obtaining economic welfare gains from trade. The relevant international relative price is P_A/P_B = 2. Albania would therefore choose to produce at which point (a, b, or c)? Given this additional information, in which good does Albania enjoy a comparative advantage?

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Definitions:

Absorption Costing

A financial strategy that absorbs all the manufacturing outlays, encompassing direct materials, workforce costs, alongside both adaptable and unchanging manufacturing overheads, into the cost of a product.

Unit Product Cost

The cost allocated to a single unit of product, encompassing direct materials, direct labor, and allocated overhead costs.

Income Statement

A financial report outlining the revenues, expenses, and profits or losses of a company over a specific period.

Fixed Manufacturing Overhead

Costs associated with production that do not change with the level of output, such as rent for factory facilities or salaries of permanent staff.