The United States and Mexico can each produce automobiles for $20,000 and 230,000 pesos (P), respectively. Suppose that U.S. auto producers decide to raise prices to take advantage of their comparative advantage. What is the maximum price that they can establish (net of trade costs) that will just allow them to sell U.S. autos at the same price as Mexican-produced autos?

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First, we need to convert the cost of Mexican-produced autos to dollars using the current exchange rate. If 1 USD = 18 pesos, then 230,000 pesos = $12,778. We can now compare the costs of producing an automobile in both countries:

- U.S. cost: $20,000
- Mexican cost: $12,778

This means that the U.S. has a comparative advantage in automobile production. To take advantage of this, U.S. auto producers will raise their prices to just below Mexican-produced autos, since this is the highest price that consumers are willing to pay for a U.S. auto.

To find this price, we need to subtract the trade costs (tariffs or transportation costs) from the Mexican price to get the net price of Mexican autos. Let's assume that these trade costs add an additional 15% to the price of Mexican autos, so the net price would be:

Net Mexican price = $12,778 + (15% x $12,778) = $14,699.70

Now, we can compare the U.S. cost to the net Mexican price:

$20,000 < $14,699.70, so U.S. auto producers cannot simply match the net Mexican price, or they will lose business. Therefore, they must set their price below this level, but not too much lower, since they still want to maximize their profits.

Let's assume that U.S. auto producers set their price at $x. Then, we have:

U.S. price: $x
Net Mexican price: $14,699.70

Since these prices are the same, we can set up the equation:

$20,000 = $x + ($x/1.15)

Solving for x gives:

x = $20,909.09

Therefore, the maximum price that U.S. auto producers can establish (net of trade costs) that will just allow them to sell U.S. autos at the same price as Mexican-produced autos is $20,909.09.

The United States and Mexico Can Each Produce Automobiles for $20,000