Question

In: Economics

Assume that Home and Foreign produce only two goods – wheat and carrots. Home has 1000...

Assume that Home and Foreign produce only two goods – wheat and carrots. Home has 1000 units of labour available. In Home, the unit labour requirement in wheat production is 4 and in carrot production it is 2. On the other hand, Foreign has 750 units of labour available. Foreign’s unit labour requirement in wheat production is 5, while in carrot production it is 1.

a. Graph both Home’s and Foreign’s production possibility frontiers. [3 points]

b. Calculate the opportunity cost of producing wheat in terms of carrots in both Home and Foreign. [3 points]

c. In the absence of trade, what would the price of wheat in terms of carrots be in both countries? Why? [3 points]

d. Construct the world relative supply curve. You are required to explain and show on your diagram the relative prices at which the relative supply curve is horizontal and the relative quantity at which the relative supply curve if vertical. [3 points]

Now suppose world relative demand takes the following form:

Demand for wheat/demand for carrots = price of carrots/price of wheat.

e. Graph the world relative demand curve along with the world relative supply curve. You are required to show at least three points that you used to derive the relative demand curve.[3 points]

f. What is the free-trade equilibrium relative price of Wheat? [3 points]

g. Describe the pattern of specialization and trade. [3 points]

h. Show that both Home and Foreign gain from trade. [3 points]

i. Suppose that the number of workers decreases from 1000 to 600 in Home. Find the new equilibrium relative price and show it on the diagram. [3 points]

j.   Suppose that Home has now 600 workers, but they are twice as productive in both industries as we have been assuming. Consider Foreign to have the initial 750 workers only and the same productivity in both industries. Construct the world relative supply curve and determine the equilibrium relative price. How do the gains from trade compare with those in the case described in problem h.    [3 points]

Solutions

Expert Solution

Acc to Ques:

HOME

Avaliable labour = 1000 units

Unit labour requirement: Wheat = 4 units

Carrot = 2 units

If all the work units are utilized to produce wheat, there will be (1000/4) = 250 units of wheat and 0 units of carrot. Ascertaining also we can make the accompanying table:

CARROT WHEAT
0 250
100 200
200 150
300 100
400 50
500 0

Foreign:

Avaliable labour = 750 units

Unit labour requirement: Wheat = 5 units

Carrot = 1 unit

If all the labour units labour units are utilized to produce wheat, there will be (750/5) = 150 units of wheat and 0 units of carrot. Ascertaining also we can make the accompanying table:

CARROT WHEAT
0 150
250 100
500 50
750 0

(a) Plotting the points from the table above on a graph, we get the production possibility frontiers.

Home's production possibility frontier:

Foreign's production possibility frontier:

(b) Home:

To create 50 additional units of wheat, we need to surrender 100 units of carrots. ( (As can be seen going up from the bottom most row of the Home production table or from the Home production possibility frontier)

Consequently, so as to create 1 more unit of wheat we have to surrender 2 units of carrot.

Consequently, the opportunity cost of creating wheat in terms of carrot is 2.

(c) Home:

In the absence of trade,

Cost of wheat = 2 * Price of carrot

At the point when the economy is shut, relative cost is dictated by the opportunity cost. At equilibrium, cost of good should rise to the cost of production of the great.

Unfamiliar:

In the absence of trade,

Cost of wheat = 5 * Price of carrot

At the point when the economy is shut, relative cost is dictated by te opportunity cost. At equilibrium, cost of good should rise to the cost of production of the Good

(d)

The world relative supply curve is as shown above.


Related Solutions

Assume that Home and Foreign produce only two goods – wheat and carrots. Home has 1000...
Assume that Home and Foreign produce only two goods – wheat and carrots. Home has 1000 units of labour available. In Home, the unit labour requirement in wheat production is 4 and in carrot production it is 2. On the other hand, Foreign has 750 units of labour available. Foreign’s unit labour requirement in wheat production is 5, while in carrot production it is 1. Graph both Home’s and Foreign’s production possibility frontiers.
Suppose two countries, home and foreign, produce two goods, timber and televisions. Assume that land is...
Suppose two countries, home and foreign, produce two goods, timber and televisions. Assume that land is specific to timber, capital is specific to televisions, and labor is free to move between the two industries. When the Home country moves into doing free trade with the Foreign country, the Home country exports timber. True or False. Explain 1. The Home country produces only timber under free trade. 2. Going from closed economy to free trade, the opportunity cost of TV increases...
There are two countries Home and Foreign. They can produce two goods, apples and bananas. Home...
There are two countries Home and Foreign. They can produce two goods, apples and bananas. Home has 1,200 units of labor available and Foreign has a labor force of 800. The table below contains the unit labor requirement in Foreign and Home for each of two goods. Banana Apples Home aB = 1 hour per pound aA = 2 hours per pound Foreign aB = 4 hours per pound aA = 5 hours per pound 1. Suppose that, after opening...
Suppose there are two countries – Home and Foreign – that produce only coffee and sugar....
Suppose there are two countries – Home and Foreign – that produce only coffee and sugar. It takes home workers three hours to produce a bag of coffee; and four hours to produce a bag of sugar. Foreign country is less productive – their workers spend seven hours to make a bag of coffee and a half of a day (twelve hours!) to eventually produce a bag of sugar. 1. Which country has an absolute advantage in coffee? Sugar? Explain...
Consider a world with two countries, Home and Foreign, both able to produce two goods: cloth...
Consider a world with two countries, Home and Foreign, both able to produce two goods: cloth and tablet computers. The production of both goods uses capital and labor in fixed proportions, with the tablets industry using more capital per worker than the cloth industry. The units of each input needed to produce one unit output are given by: capital Labor Cloth 1 2 Tablets 2 1 Both countries have 150 units of capital available for production, but the Home country...
Consider two countries​ (Home and​ Foreign) that produce goods 1​ (with labor and​ capital) and 2​...
Consider two countries​ (Home and​ Foreign) that produce goods 1​ (with labor and​ capital) and 2​ (with labor and​ land). Initially, both countries have the same supply of labor ​(100 units​ each), capital, and land. The capital stock in Home then shrinks. This change shifts in both the production curve for good 1 as a function of labor employed and the associated marginal product of labor curve. Nothing happens to the production and marginal product curves for good 2. a....
Consider two countries (Home and Foreign) that produce goods 1 (with labor and capital) and 2...
Consider two countries (Home and Foreign) that produce goods 1 (with labor and capital) and 2 (with labor and land) according to the production functions q1 = L10.5K0.5 and q2 = L20.5T0.5 where Li is the labor input in sector i = 1, 2, K is capital, and T is land. a. Suppose there is capital inflow from the foreign country so that K increases. How would this affect the marginal product of labor in sector1. (If you do not...
Consider two contries that F produce two goods X and Y defines as follows. HOME FOREIGN...
Consider two contries that F produce two goods X and Y defines as follows. HOME FOREIGN X= Alx a=10 X=aLX,a=5 Y=bLy,b=10 Y=Bly,B=10 LH=10 LF=10 Describe the PPF for each country ?
Assume a Ricardian model with two countries, Home and Foreign, that both produce coffee and tea....
Assume a Ricardian model with two countries, Home and Foreign, that both produce coffee and tea. Home has 600 units of labor (L) available. Home’s unit labor requirement in the production of coffee is aLC = 4, while in the production of tea it is aLT = 3. Foreign has 800 units of labor (L*) available. Foreign’s unit labor requirement in the production of coffee is a*LC = 2, while in the production of tea it is a*LT = 1....
Consider two countries, Green (Home) and Purple (Foreign), which produce butter and jam. There is only...
Consider two countries, Green (Home) and Purple (Foreign), which produce butter and jam. There is only one factor of production (labor). In order to produce a pound of butter, a Home worker needs 5 hours, while a Foreign worker needs 4 hours. In order to produce a pound of jam, a Home worker needs 4 hours, while a Foreign worker needs 3 hours. Markets are perfectly competitive. Labor endowments are equal across countries: L = L* = 3300 hours a)...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT