aps1 301 f06_Solutions - Econ 301 F06 ANSWERS PROBLEM SET 1...

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Econ 301 – F06 ANSWERS PROBLEM SET 1 Wissink 1. Two countries, Inland and Outland, produce artichokes (A) and bathing suits (B). Inland can produce either 200 artichokes and no bathing suits or 100 bathing suits and no artichokes or any linear combination of the two, and Outland can produce 150 artichokes or 150 bathing suits or any linear combination of the two. a) On separate graphs draw the production possibilities frontiers for Inland and Outland. b) What is Inland's marginal opportunity cost of producing artichokes? Of producing bathing suits? What is Outland's marginal opportunity cost of producing artichokes? Of producing bathing suits? Inland: MOC of A is 1/2 B; MOC of B is 2A Outland: MOC of A = 1B; MOC of B is 1A c) Each country is said to have a comparative advantage in specializing in the good that it produces more cheaply. Which country will produce artichokes and which country will produce bathing suits? Why? Inland produces A because its MOC of producing A is lower. Outland produces B. d) What is the maximum price that Inland would be willing to pay for the good that it does not produce and still be willing to participate in trade? Explain. What is the maximum price that Outland would be willing to pay for the good that it does not produce? Explain. Inland is willing to pay up to 2A for 1B. Outland, up to 1B for 1A. The maximum price a country would be willing to pay is its own MOC for the good. If the exchange rate for the good the country buys is more than its own MOC, it can always do better producing more cheaply domestically. e) Suppose that Inland and Outland agree on a price of 1.5As for 1B. If Inland were to sell to Outland all of the good that it specializes in, how much of the other good could it buy? If Outland were to sell to Inland all of the good that it specializes in, how much of the other good could it buy? On the graphs from part (a) above, use this information to draw new production possibilities frontiers for Inland and Outland. Assume trade occurs at the price of 1.5 As for 1B. Inland can buy 200 x 2/3 = 133.33B. Outland can buy 150 x 3/2 = 225A. Gains from trade come about because by specializing and trading at reasonable exchange rates, both countries can have more of both goods than if they operated in isolation. 2. Consider a small community which consists of three producers: Jay, Kay and Dee. The following table shows how many hours it takes each person to produce one pound of food or 1 yard of cloth. Assume that each person works a total of 48 hours/week.
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Person Hours/ pound of food of cloth Food production Production Food (yards of cloth/ pound of food) Cloth (pounds of food/ yard of cloth) Jay 1 2 48 24 0.50 2.00 Kay 2 1 24 48 2.00 0.50 Dee 4 3 12 16 1.33 0.75 Maximum Rates per 48 hours Opportunity Costs Input Requirements Table (a) a) Who has the comparative advantage in food production? Who has the comparative advantage on cloth production?
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aps1 301 f06_Solutions - Econ 301 F06 ANSWERS PROBLEM SET 1...

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