Problem Set #3

aLS = 6 hours per pound aLG = 5 hours per gallon If the price per pound of shrimp (Ps) is $18, the hourly wage rate in the shrimp sector of Home's economy will be

$3

Suppose that the resources base in Country X can produce either 100 units of alpha or 300 units of beta. Similarly, suppose that Country Y's resource base is capable of producing 100 units of alpha or 200 betas. Clearly, the opportunity cost of 100 alphas is lower in ... Based on this result, it would be best for Country X to concentrate on good...

- Country Y - beta

aLC = 6 hours per pound aLW = 5 hours per gallon a*LC = 2 hours per pound a*LW = 6 hours per gallon As long as the world equilibrium relative price (Pc/Pw) lies between 0.33 and 1.2 gallons, the two countries will specialize, with all Foreign workers producing In post-trade equilibrium the wage of workers in Foreign relative to the wage of workers in Home will lie between:

- cheese. - 0.83 and 3.

Home has 1,200 units of labor available. It can produce two goods, apples and bananas. The unit labor requirement in apple production is 3, while in banana production it is 2. What is the opportunity cost of apples in terms of bananas?

1.5 bananas

In the absence of trade, what would be the price of apples in terms of bananas be? Why?

1.5 bananas because without trade, the relative prices of the goods are equal to their relative unit labor requirements.

aLC = 6 hours per pound aLW = 5 hours per gallon a*LC = 2 hours per pound a*LW = 6 hours per gallon In post-trade equilibrium with Pc = Pw = $20, the wage of workers in Foreign relative to the wage of workers in Home will be equal to:

2.5 (a ratio not dollar amount)

Assume the U.S. currently grows 3.0 million tons of fresh winter fruit and that the resources absorbed in the production of this fruit could have produced 275,000 laptop computers. Therefore, the opportunity cost of those 3.0 million tons of fruit is ________ computers.

275,000

Home has 1,200 units of labor available. It can produce two goods, apples and bananas. The unit labor requirement in apple production is 3, while in banana production it is 2. There is now also another country, Foreign, with a labor force (L) of 800. Foreign's unit labor requirement in apple production (aLA) is 5, while in banana production (aLB) it is 1. Derive the equation for Foreign's production possibility frontier:

Qb = (800/1) - (5/1) * Qa Qb = (L/aLB) - (aLA/aLB) * Qa

"Chinese workers earn only $0.75 an hour; if we allow China to export as much as it likes, our workers will be forced down to the same level. You can't import a $10 shirt without importing the $0.75 wage that goes with it." Evaluate the statement above.

False, relative wages are determined by comparative productivity and relative demand for goods; therefore, since our workers are much more productive than Chinese workers, our wages will not be forced down to the same level.

aLC = 6 hours per pound aLW = 5 hours per gallon a*LC = 2 hours per pound a*LW = 6 hours per gallon In the absence of trade between Home and Foreign the unit labor requirements given above indicate that the relative price of candy (Pc/Pw) will be lower in _____.

Foreign

With the Relative price of apples (Pa/Pb) being 2 and the Relative quantity of apples being 1/2, describe the pattern of trade. With respect to the equilibrium relative price, which of the following statements is false?

Home produces only apples, Foreign produces only bananas, and each country trades with the other. With trade, Foreign is worse off because one apple can only purchase 2 bananas, whereas without trade one apple can purchase 5 bananas.

This exercise applies the basic Ricardian model of one factor (labor) and two goods to the national economy of Home. Assume the following: - aLS = # of labor hours needed to produce a unit of sugar in Home; - aLC = # of labor hours needed to produce a unit of calico in Home - Ps = the price per ton of sugar - Pc = the price per bolt of calico Which of the following conditions signifies that workers in Home will all want to work in the calico sector?

Pc/Ps > aLC/aLS

Japanese labor productivity is roughly the same as that of the US in the manufacturing sector (higher in some industries, lower in others), while the United States is still considerably more productive in the service sector. But most services are non-traded. Some analysts have argued that this poses a problem for the US, because our comparative advantage lies in things we cannot sell on world markets. What is wrong with this argument?

The argument incorrectly calculates comparative advantage. Its calculation is based on aLS < a*LS instead of aLS/aLM < a*LS/a*LM

Consider Home's production possibilities curve. Which of the following does the absolute value of its slope convey?

The opportunity cost of cheese in terms of whiskey.

Suppose that South America could have instead produced those 3.0 million tons of fruit at an opportunity cost of 150,000 laptops. Because of the difference in opportunity costs between the two regions, it can be shown that trade gives the possibility of...

a mutually beneficial rearrangement of world production.

In the graphical portrayal of world equilibrium, the relative demand curve of candy is downward slopping and the relative supply curve of candy is shaped as:

a step function.

Anyone who has visited Japan knows it is an incredibly expensive place; although Japanese workers earn about the same as their US counterparts, the purchasing power of their incomes is about one-third less. Japanese productivity is roughly the same as that of the US in the manufacturing sector (higher in some industries, lower in others), while the US is still considerably more productive in the service sector. But most service are non-traded. US purchasing power is higher than that of Japan

due to its lower prices on non-traded goods.

Countries to the left of the equilibrium relative price would ________ apples to the countries to the right of the intersection.

export

The one-factor Ricardian model refutes the myth that free trade is beneficial only if a country is strong enough to stand up to foreign competition by

indicating that a country only needs a comparative advantage to benefit from trade.

A country has a comparative advantage in producing a good if...

its opportunity cost of producing that good is lower than elsewhere.

Once Home and Foreign engage in trade, the world equilibrium relative price of candy (Pc/Pw) will be determined by the...

relative supply and demand of candy.

Economists use the term opportunity cost to refer to

the value of the next best alternative occurring as a result of making a particular choice.