(Figure: Upperia's Production and Consumption) The graph shows Upperia's international trading pattern. Point P is production with trade, and point C is consumption with trade. What is the international price of shoes (shirts/pair of shoes)?
A) 125/80 shirts per unit of pair of shoes
B) 4/3 shirts per unit of pair of shoes
C) 5/4 shirts per unit of pair of shoes
D) 3/4 shirt per unit of pair of shoes

Question

(Figure: Upperia's Production and Consumption) The graph shows Upperia's international trading pattern. Point P is production with trade, and point C is consumption with trade. What is the international price of shoes (shirts/pair of shoes)? 
A) 125/80 shirts per unit of pair of shoes 
B) 4/3 shirts per unit of pair of shoes 
C) 5/4 shirts per unit of pair of shoes 
D) 3/4 shirt per unit of pair of shoes

Quizplus · Accepted Answer

The international price ratio of goods is determined by dividing the price of one good in terms of the other good. From the graph, we can see that Upperia produces shoes at a lower cost than shirts (the shoes production possibility curve intersects the y-axis lower than the shirts production possibility curve). Therefore, Upperia has a comparative advantage in producing shoes. At point P, Upperia produces 40 pairs of shoes and 60 shirts and then trades 20 pairs of shoes for 40 shirts on the international market. This means that the international price ratio of shoes to shirts is 40/40 or 1/1 in terms of trade. However, Upperia ends up consuming 36 pairs of shoes and 48 shirts at point C. This means that the international price ratio of shoes to shirts is 48/36, which simplifies to 4/3. Therefore, the answer is B.

(Figure: Upperia's Production and Consumption) the Graph Shows Upperia's International