Exam 1 Solutions

# Exam 1 Solutions - Solutions Exam I 1 D 2 B 3-D 4-D 5-C 6-B...

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Solutions Exam I: 1.- D 6.-B 11.-A 2.- B 7.-B 12.-E 3.-D 8.-B 13.-D 4.-D 9.-E 14.-C 5.-C 10.-E 15.-D 16.- This question has to do with the 2 goods – 2 countries Ricardian model. Is given: U.S.: a lm =140 Colombia: a lm * = 350 a lc = 35 a lc * = 50 a) The O.C. of movies in terms of computers is the number of computers that could have been produced with the resources used to produce a given number of movies, which is 4 computers per movie in the U.S. Now, in the absence of trade, the relative price of movies in terms of computers is equal to the O.C. of movies in terms of computers, which are: 4 35 / 140 . . = = = = C O a a P P lc lm A c m 7 50 / 350 . . * * * = = = = C O a a P P lc lm A c m b) 7 50 / 350 . . . . 35 / 140 4 * * = = = < = = = C O a a a a C O lc lm lc lm So, the U.S. has the comparative advantage in the production of movies and Colombia has the comparative advantage in the production of computers. c) A country has an absolute advantage (AA) in the production of a good if the unit labor requirement is lower than in the other country, or if its productivity is higher. Now, a country has a comparative advantage (CA) in the production of a good if the opportunity cost of producing that good in terms of the other good is lower in that country than in the other country. AA shows productivity differences, while CA determines production patterns as countries specialize in the production of its CA good. d) We know now that L=70,000 and L * =125,000 500 ; 2000 4 2000 = = = = m c m c m lc lm lc c Q Q Q Q Q a a a L Q 357 ; 2500 7 2500 * * * * * * * * * * = = = = m c m c m lc lm lc c Q Q Q Q Q a a a L Q

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Q c Q * c 2500 2000 500 Q m 357 Q * m e) Free trade equilibrium is given by: C M P P RD=P C /P M RS 4 1/4 = 0.25 0 Æ 0.2 5 1/5 = 0.2 0.2 7 1/7 = 0.143 0.2 Æ infinity Graphically: P m /P c 7 RS 5 4 RD ( L / a lm )/(L * /a * lc
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Exam 1 Solutions - Solutions Exam I 1 D 2 B 3-D 4-D 5-C 6-B...

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