Question

1)Assume the Ricardian model where the marginal product of labor in the home country is 3 in the cheese industry and 2 in the wine industry. The home country has 10 workers. The relative price of wine (Pw/Pc) is 2 after trade. After trade the home country consumes 12 units of wine. Use this information to calculate

a. The relative price of wine before trade

b. The slope of the production possibilities frontier, where wine is on the horizontal axis and cheese on the vertical axis.

c. The good that the home country export and how much

d. Bonus. Home country's cheese consumption after trade

2)Explain what is meant by factor price equalization. In which model does factor price equalization occur? Why does factor price equalization occur?

3)Assume that the world price of good X is $10. At that price, domestic supply is 10 and demand is 20. Assume that a small country, Economica, institutes a $2 tariff. After the tariff, domestic supply is 12 and demand is 18. Use this information to calculate the effect of the tariff on

a. Consumer surpllus

b. Tariff revenue

c. Production deadweight loss

4)Explain why enacting a quota may result in lower total surplus than a tariff, even if they have the same effect on imports and the domestic price.

Answer 1

A) relative price before trade will equal to opportunity cost of wine.

Opportunity cost of wine=3/2=1.5

B)Slope of PPF=opportunity cost of wine( as wine is on horizontal axis)

Slope of PPF=1.5

C) Because after trade relative price(2) of wine is higher than autarky(1.5), which means by exporting wine, home country will be benefited.

So home country will specialize in wine. And export it.

When home country specialize in wine ,

Total production of wine=10*2=20

Given that after trade home country consume 12 wine.

So export quantity of wine=20-12=8 units.

D) relative price of wine after trade =2, which means by exporting 1 unit of wine ,home country can get 2 unit of cheese.

So export quantity of wine=8 unit

So quantity of cheeee=2*8=16 unit

.so consumption of cheese after trade=16