Question

The next three questions deal with the following situation:

Consider two city-states: Gilead and Mahishmathi. They can produce two goods: gun- powder and maple syrup. In a single year, Gilead can make 1,000 tons of gunpower and 1,500 tons of maple syrup. In the same period of time, Mahishmathi can produce 2,000 tons of gunpowder and 1,500 tons of maple syrup.

1. Which of the following statements is true?

(A) Gilead has comparative advantage in gunpowder and absolute advantage in gun-powder.

(B) Gilead has comparative advantage in maple syrup,and absolute advantage in maple syrup.

(C) Mahishmathi has absolute advantage in gunpowder, and comparative advantage in gunpowder.

(D) Mahishmathi has absolute advantage in gunpowder, and comparative advantage in maple syrup.

2. Assume that both nations are productively efficient, and that they each have a constant Marginal Rate of Transformation. Initially, before trade, Gilead makes 750 tons of maple syrup, and Mahishmathi makes 750 tons of maple syrup. How much gunpowder does Gilead produce?

(A) 500 tons. (B) 1,125 tons. (C) 1,000 tons. (D) 750 tons.

3. Assume that both nations are productively efficient, and that they each have a constant Marginal Rate of Transformation. Initially, before trade, Gilead makes 750 tons of maple syrup, and Mahishmathi makes 750 tons of maple syrup.
Now they decide to trade. Which of the following is a beneficial trade for both nations?

(A) Gilead trades 100 tons of gunpowder for 200 tons of maple syrup.

(B) Gilead trades 100 tons of gunpowder for 175 tons of maple syrup.

(C) Gilead trades 100 tons of gunpowder for 125 tons of maple syrup.

(D) None of the above.

4. Consider the market for Greek fishermen’s hats. There are only five producers in this market: Adonis, Boreas, Charon, Demeter, and Erebus. The market price of a Greek fisherman’s hat is $100. Each producer’s cost of production is as follows: Adonis ($20), Boreas ($25), Charon ($30), Demeter ($101), and Erebus ($110).

What is the total Producer Surplus in this market?

(A) $214. (B) $224. (C) $225. (D) $155.

Answer 1

1. (C) Mahishmathi has absolute advantage in gunpowder, and comparative advantage in gunpowder.
(Opportunity cost of 1 gunpowder in Gilead = Maple syrup given up/gunpowder produced = 1500/1000 = 1.5 maple syrup
Opportunity cost of 1 gunpowder in Mahishmati = Maple syrup given up/gunpowder produced = 1500/2000 = 0.75 maple syrup
So, Mahishmati has comparative advantage in gunpowder because of lower opportunity cost.)

2. (A) 500 tons
(In Gilead, 1.5 maple syrup = 1 gunpowder
So, 1 maple syrup = 1/1.5 gun powder
So, 750 maple syrup = 750/1.5 = 500 gunpowder given up
So, gunpowder produced = 1000 - 500 = 500)

3. (C) Gilead trades 100 tons of gunpowder for 125 tons of maple syrup.
(In Gilead, 1.5 maple syrup = 1 gunpowder
so, 100 gunpowder = 1.5*(100) = 150 maple syrup
In Mahishmati, 1 gunpowder = 0.75 maple syrup
So, 100 gunpowder = .75*(100) = 75 maple syrup
So, 125 tons of maple syrup lies between this ratio and this will be beneficial.)

4. (C) $225
​​​​​​​(Total PS = (100-20) + (100-25) + (100-30) = 80 + 75 + 70 = 225)