ETS Chapter 14

Question 1

Under what condition does trade occur between separate markets?

Answer 1

when the price difference between two markets is greater than the transportation cost.

Formula: If
𝑐12 < 𝑝2 − 𝑝1 trade is profitable.

Example: If the price of a product in Market 1 is $10, in Market 2 it is $15, and the transportation cost is $3, then trade is profitable because $3 < ($15 - $10).

Question 2

What is a comparative benefit in transportation markets?

Answer 2

Comparative benefit refers to the advantage one market has over another due to lower costs, better technology, or efficient production.

Example: A country with lower labor costs can produce goods more cheaply and export them to high-cost markets, making trade beneficial.

Question 3

How do equilibrium prices change when two markets start trading?

Answer 3

Equilibrium prices adjust so that the price difference equals the transportation cost. Eventually, prices in both markets move closer together.

Example: If Market 1 has a price of $10 and Market 2 has $15, and trade starts with a transport cost of $2, the new equilibrium prices might be $11.50 and $13.50.

Question 4

What happens when transportation costs drop?

Answer 4

Lower transportation costs make trade more profitable, increasing the flow of goods between markets and reducing price differences.

Example: If the cost to transport a product drops from $3 to $1, more traders will engage in trade, reducing price gaps between regions.