Question

Suppose a country's workers can produce 4 watches per hour or 12 rings per hour. If there is no trade, what is the domestic price of 1 ring in terms of watches?

1) 3 watches
2) 1/3 watches
3) 4 watches
4) 1/4 watches
5) 12 watches

Answer 1

The domestic price of 1 ring in terms of watches without trade is 1/3 of a watch, as the opportunity cost of producing a ring is 1/3 of a watch that could have been produced in the same amount of time.

Step-by-step explanation:

To determine the domestic price of 1 ring in terms of watches without trade, we need to establish the opportunity cost of producing one good over the other. In this case, a country's workers can produce either 4 watches per hour or 12 rings per hour.

This means that the opportunity cost of producing 1 watch is 3 rings (since instead of producing 1 watch, workers could have produced 3 rings). Conversely, the opportunity cost of producing 1 ring is 1/3 of a watch (since instead of producing 1 ring, workers could have produced 1/3 of a watch).

Therefore, using the opportunity cost, we can find the domestic price of 1 ring in terms of watches. If 1 watch equals 3 rings, then 1 ring would be worth 1/3 of a watch. Hence, the correct answer is option 2) 1/3 watches.