Schuler
Economics Professor 101
Spring 2006
Quiz 1
Wednesday, February 15, 2006 Since the U.S.'s capacity for constructing nuclear weapons dwarfs the capability of most other countries in the world, let's explore the economics underlying the recent furor over North Korea's alleged intention to build a bomb. Suppose in a simple two-good economy, the U.S. is capable of manufacturing up to 1,000-fifty kiloton devices per year; whereas, if all of the U.S.'s production capability were turned to growing wheat (a starch), we could produce a maximum of 10,000 million tons of wheat per year. By comparison, North Korea could produce a maximum of 50 million tons of rice (a starch) per year if it doesn't devote some of its resources to building nuclear weapons. Alternatively, North Korea could produce a maximum of 100-fifty kiloton nuclear weapons per year if they didn't produce any food (starch). Currently, North Korea requires 48 million tons of rice per year to feed its population, but its leaders calculate that given their production capabilities, they would like to produce 4-fifty kiloton devices nuclear annually in order to maintain the respect of other nations. a. (25 pts.) Assuming the production possibility frontiers for each of these nations are straight lines, sketch and label both the U.S.'s and North Korea's PPF. b. (20 pts.) Compute and describe both North Korea's and the U.S.'s opportunity costs of producing nuclear weapons. c. (10 pts.) Which country has a comparative advantage in producing nuclear weapons, assuming one ton of wheat is equivalent to one ton of rice, nutritionally? d. (30 pts.) If the U.S. feels it requires 96 additional nuclear weapons every year in order to maintain world peace, but the U.S. never consumes more than 5,000 million tons of wheat per year, explain why or why not, in terms of economic principles, both countries might be made better off if they were to specialize their production and negotiate a trade agreement. Describe who would do what and why. e. (15 pts.) Also explain why, in terms of additional economic principles, that it is highly unlikely that the type of trade agreement suggested in part (d) will ever be attained. 1