Firm A and Firm B are two firms making backpacks and pencil cases for school children. The following table describes their possible outputs per day.

Table 1

Backpacks

Firm A

4

Firm B

2

Pencil cases

or

or

600

200

i) Based on Table 1, which firm has an absolute advantage in pens and which firm has an absolute advantage in backpacks? Explain your answer. (2 marks)

ii) Based on Table 1, which firm has a comparative advantage in pens and which firm has a comparative advantage in backpacks? Show your workings and explain. (2 marks)

iii) What is an acceptable exchange rate for a backpack, in terms of pencil cases, in order to make the terms of trade beneficial (better than not trading) for both firms? (1 mark)