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ec1ps5 - Department of Economics University of California...

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1 Department of Economics Prof. Kenneth Train University of California, Berkeley Fall Semester 2008 Economics 1 Problem Set 5 Due in the second section meeting in the week of Dec. 1. 1. Let's examine a trade agreement between U.S and Mexico. We will examine a simple two goods case, brooms and microchips. Each country has 10 workers who can produce either microchips or brooms. A worker in U.S can produce 9 microchips a day or 1 broom a day. A worker in Mexico can produce 1 microchip or 9 brooms a day. This can be summarize in the following table: Output per worker U.S. Mexico Microchips 9 1 Brooms 1 9 a) Draw the production possibilities frontier (PPF) of microchips and brooms for U.S. b) Draw the production possibilities frontier (PPF) of microchips and brooms for Mexico. c) Explain how trade can benefit both the U.S and Mexico. Which country will import brooms and which country microchips? d) Suppose the terms of trade (i.e., prices) are such that one microchip is traded for one broom.
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