When there is no trade between Econia and Macroland, the price of a hairbrush is $6 in Econia and $8 in Macroland, while the price of a pair of socks is $5 in Econia and $4 in Macroland. If trade opened up between the two countries, which of these would be the terms of trade that might result, assuming that there are no transportation costs? a) The price of a hairbrush would be $6 and the price of socks would be $5 in both countries.
b) The price of a hairbrush would be $7 and the price of socks would be $4.50 in both
c) The price of a hairbrush would be $8 and the price of socks would be $5 in both
d) The price of a hairbrush would be $8 and the price of socks would be $4 in both countries countries rnuntries

b) The price of a hairbrush would be $7 and the price of socks would be $4.50 in both

Explanation:

Given that:

When there is no trade between Econia and Macroland;

For Hairbrush

the price of a hairbrush is $6 in Econia

the price of a hairbrush is $8 in Macroland

For a Pair of Socks

the price of a pair of socks is $5 in Econia

the price of a pair of socks is $4 in Macroland

Now if rade opened up between the two countries; we are to determine from the given options; the  terms of trade that might result, assuming that there are no transportation costs.

From the given data;

the price of the hairbrush is seen to be lesser in Econia than in Macroland; so it is best if Econia export the hair brush to Macroland since the price is lesser which will be of advantage to Macroland as they import the hairbrush ; Also Econia will benefit from this trade by increasing the price a little bit but not up to the price at which it is sold for at Macroland.

Now; The hairbrush is sold for $6 in Econia and $8 in Macroland.

It will be  bet if Econia can sell the hairbrush at the rate of somewhere between $6-$8 ; let say $7 since it will be an added  advantage for Econia because the price of selling the hairbrush will increase from $6 to $7 ; also, the price at which it is sold at Macroland will now have to reduce from $8 to  7.

Also;

The price of th pair of socks is lesser in Macroland (which is sold at the rate of $4 ) and the price of the pair of socks is sold at the rate of $5 in Econia.

So here ; Macroland will export the pair of socks to Econia while Econia import the pair of socks.

So; let say any price  between $4 and $5 (i.e $4.50) for a pair of socks will be okay for both parties because Macroland will get a higher price if it exports socks and Econia will pay lower price by importing socks which is up to $5.

Therefore; from the above explanation, The best option that suits to be the answer is option b ; The price of a hairbrush would be $7 and the price of socks would be $4.50 in both

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