Tutorial Questions Week 2
Suppose the United States and Mexico are the only countries in the world,
and labor is the only productive input. Suppose the technology of the two countries is characterized by the following input requirement table:
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TVs Mexico 6 hrs/unit United States 3 hrs/unit
Computers 4 hrs/unit 3 hrs/unit
a) Which country has absolute advantage in TV¡¯s In Computers? Explain.
b) Determine the pre-trade relative prices, i.e. the price of a television in units of computers in each country?
c) Calculate the opportunity cost of production of each good for both countries.
d) Which country has comparative advantage in X? In Y? Explain.
e) Suppose that each country has 60 hours of labor available. Draw the PPF for each country and determine its slope.
f) If Mexico and the United States form a free trade area, in what range would the terms of trade (that is, the price of a television in units of computer under
free trade) have to fall? Why?
Question 2 Answer the following questions based on the diagram below.
EB represents the country¡¯s PPF, FB represents the terms of trade line (world price line), and CIC is
country¡¯s indifference curve.
a) This country has comparative advantage in good
a. S b. T c. Y d. Z
b) In the equilibrium under free trade, this country produces at point
a. B b. C c. D d. E
c) In the equilibrium under free trade, this county consumes at point
a. B b. C c. D d. E
d) Exports for this country equal
a. OA units of Z
b. AB units of Z
c. AC units of Y
d. AD units of Y
e) Imports for this country equal
a. OA units of Z b. AB units of Z c. AC units of Y d. AD units of Y
Assume that technology of production in the United States and Russia can be characterized by the following table of MPL¡¯s:
Russia United States
Kombucha Coca-Cola 2 1
Assume that the US has 30 units of labor and Russia has 10.
a) Which country has absolute advantage in cola? In kombucha?
b) What are autarky production and consumption in each country? Why? Support your argument with graphs.
c) Consider relative price of cola Pc/Pk=3. Is this price ratio consistent with the world trade equilibrium? What about Pc/Pk=0.2?
d) Draw export supply and import demand curves for cola. Show how world trade price is determined
Consider the case when the US soda industry is way larger than Russia. In particular, labor resources available in the US are 100 units and available in Russia is 10 units.
a) Draw exports supply and import demand diagrams for Coca-Cola b) What will happen with relative prices in trade equilibrium? Why? c) What country gains from trade in this scenario
Labor Requirements to Produce One Unit Cloth Wheat
Home 10 20 Foreign 60 30
a) Which country has comparative advantage in cloth? Absolute advantage?
b) Can any country benefit from trade if the world relative price of cloth (Pclothw / Pwheatw) equals 1/2
a. both countries could benefit from trade with each other.
b. neither country will want to export the good in which it enjoys comparative
c. Home can not benefit from trade.
d. Foreign can not benefit from trade.
c) What happens if the Foreign economy experiences a great improvement in production technologies, so that the unit labor requirement for cloth was reduced to 15, then Home could gain from trade by
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