Unformatted text preview: Economics 143 Homework #1 Due: Friday, February 2 Instructions: Please type all of your answers, although you may write by hand any equations and graphs. 1. Suppose that country A’s total exports are 10,000 units of good X at a price of $20 per unit,
meaning that country A’s export earnings or receipts are $200,000. Suppose also that the foreign
price elasticity of demand for country A’s exports of good X is (-) 0.6. If country A’s prices for
all goods, including its exports, now rise by 10% because of a gold inflow such as in the
Mercantilist model, then, other things equal, country A’s exports of good X will fall by
__________ and country A’s export earnings or receipts will become
__________. 2. Given the following Classical-type table showing the number of days of labor input required to
obtain one unit of output of each of the two commodities in each of the two countries: United States
United Kingdom bicycles computers 4 days
5 days 3 days
6 days a.
d. Which country has absolute advantage in each good? What is the opportunity cost of bicycles in each country? Which country has comparative advantage in each good? Assume that the US has 12,000 labor days available, and the UK has 6,000 labor days available. Draw the production possibilities frontiers for each country. Put bicycles on the horizontal axis in each case. Bonus: What are the linear equations for each country’s PPF? e. For what range international price ratios is trade between the countries mutually beneficial? Why? f. Assume that the international price ratio is one bicycle for one computer. Draw the consumption possibilities frontiers for each country should they decide to specialize completely according to their comparative advantage. How does the comparison of their PPFs and CPFs illustrate the gains from trade? Bonus: What are the linear equations for each country’s CPF? g. Assume that US consumers want to consume equal numbers of bicycles and computers. What would they consume under autarky? What would they consume under trade at an international price ratio of 1B: 1C? ...
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- Spring '14