Question

The relative price of a unit of cloth in the small isolated country of Moribundia is 5 units of food. When then central city, Mudhole, puts in an airstrip, the country is able to engage in trade. If the relative price of cloth in the outside world is 3 units of food, then Moribundia will export ___and ____factors used in the production of ____ will benefit.

A. food; immobile; food
B. food; mobile; food
C. cloth; immobile; cloth
D. cloth; mobile; cloth
E. food; immobile; cloth

Answer 1

Moribundia will export cloth as it has a comparative advantage in producing cloth at a relative price lower than the international market, benefiting the mobile factors involved in its production.

Step-by-step explanation:

When the isolated country of Moribundia, with its central city Mudhole, puts in an airstrip and opens up to external trade, the relative price of cloth to food changes. Originally, the relative price in Moribundia was 5 units of food for 1 unit of cloth. However, on the international market, the relative price is 3 units of food for 1 unit of cloth.

This means that Moribundia has a comparative advantage in producing cloth and should specialize in its production. Therefore, Moribundia will export cloth, and the mobile factors used in the production of cloth will benefit due to the comparative advantage Moribundia gains from trade, since it can produce cloth at a lower relative cost than the world market.