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Econs.101.Sp.06.quiz1solutions

Econs.101.Sp.06.quiz1solutions - region B the total wheat...

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Professor Schuler Economics 101 Spring 2006 Quiz 1 Solutions a. See graphs below. b. North Korea : The opportunity cost of a nuclear device is 50 / 100 = 0 . 5 million tons of rice. The opportunity cost of one millions tons of rice = 100/50= 2 nuclear devices. U.S. : The opportunity cost of a nuclear device is 10000 / 1000 = 10 million tons of wheat. The opportunity cost of one millions tons of wheat is 1000 / 10000 = 0 . 1 nuclear devices. 1
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Professor Schuler Economics 101 Spring 2006 c. Since the opportunity cost of North Korea is lower for producing nuclear de- vices, they have a comparative advantage in making nuclear devices. Since the opportunity cost of the U.S. is lower for making wheat, they have a comparative advantage in making wheat. d. Let us draw the joint PPF if North Korea and the U.S. trade (see the graph below). Now, the U.S. and North Korea can gain from trade on this PPF, unless the point at which they are at is in Region A or B. Since in Region A, the number of Nuclear weapons is less than 96, the U.S. will not trade.
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Unformatted text preview: region B, the total wheat produced is less than 5000, and hence the U.S. is unable to meet its requirements. However, depending on the bargaining power of trade, the two countries can exploit gains from trade by being on the joint PPF at any other point. For example, if the two countries specialize completely, then there will be 100 nuclear weapons and 10,000 million tons of wheat. In that case, if the U.S. wants 96 devices, then North Korea gets 4, which is acceptable to it. The U.S. gets at least 5000 million tons of wheat, and the rest can be divided in a way such that North Korea gets at least 48 million tons. e. The tastes of the two countries might be quite different, so that none of the allocations along the joint PPF are acceptable to one of the countries. Also, since nuclear weapons are a form of national defense, which is a public good, the optimal allocation using markets might itself not be optimal. 2 Professor Schuler Economics 101 Spring 2006 3...
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