Question

Consider two countries: South Korea and Taiwan. Taiwan can produce one million mobile phones per day at the cost of \(10 per phone and South Korea can produce 50 million mobile phones at \)5 per phone. Assume these phones are the same type and quality and there is only one price. What is the minimum price at which both countries will engage in trade?

Short answer

The minimum price of trading between both countries is $5 per phone.

Step-by-step solution

Definition

Trading is a term by which two countries exchange goods and services with each other by paying money or product in return.

Explanation

The minimum rate at which both the countries will exchange mobile phones will be $5 per phone because this is the minimum cost of production for South Korea. Thus South Korea will not exchange the goods if the return received is less than $5. The maximum rate at which Taiwan will purchase the mobile phone will be $10 as it is the cost of production for producing one mobile phone in Taiwan.

Conclusion

The exchange rate between South Korea and Taiwan will be equal to or greater than $5 but less than $10 per phone.