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.

Question

Quizplus · Accepted Answer

According to the principle of comparative advantage, each country should specialize in producing the goods and services that it can produce relatively more efficiently (i.e. at a lower opportunity cost) than its trading partner. As a result, each country's relative prices will adjust to reflect its comparative advantage. However, the MRTs (or relative marginal costs) will not necessarily become equal in both countries, as they reflect the opportunity cost of producing one good or service in terms of the other. Therefore, choice C is the correct answer.

If Two Countries Engage in Free Trade Following the Principles