Mock Exam 1 Solutions

# Mock Exam 1 Solutions - Solutions Mock Exam I: 1.- E 2.- B...

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Solutions Mock Exam I: 1.- E 6.-A 11.-C 2.- B 7.-A 12.-B 3.-C 8.-B 13.-D 4.-C 9.-B 14.-E 5.-C 10.-C 15.-A 16.- This question has to do with the 2 goods – 2 countries Ricardian model. Is given: U.S.: a lm = 1 0 M e x i c o : a lm * = 40 a lb = 25 a lb * = 35 L = 600 L * = 1050 a) 14 . 1 35 / 40 25 / 10 4 . 0 * * = = < = = lb lm lb lm a a a a So, U.S. has a comparative advantage in the production of milkshakes and Mexico has the comparative advantage in the production of burritos. b) 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. c) 60 ; 24 4 . 0 24 = = = = m b m b m lb lm lb b Q Q Q Q Q a a a L Q 25 . 26 ; 30 14 . 1 30 * * * * * * * * * * = = = = m b m b m lb lm lb b Q Q Q Q Q a a a L Q Q b Q * b 3 0 24 60 Q m 26.25 Q * m

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d) Free trade equilibrium is given by: B M P P RD=P b /P m RS 10/25=0.4 2.5 0 Æ 2 10/20=0.5 2 2 40/35=1.14 0.875 2 Æ infinity Graphically: P m /P b 1.14 RS 0.5 0.4 RD ( L / a lm )/(L * /a * lb )=2 (Q m +Q * m )/(Q b +Q * b ) e) i.e. if the equilibrium relative price is equal to the U.S. autarkic relative price, then the U.S. will not gain from trade, but Mexico will achieve the largest possible gains from trade. f) If I was the Minister of Trade of Mexico, and if I could influence the equilibrium relative price, I would set the equilibrium relative price an epsilon larger than the U.S. autarkic relative price (i.e. 0.41). In this way Mexico gets the largest gains from trade
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## This homework help was uploaded on 03/25/2008 for the course ECON 452 taught by Professor Vacaflores during the Spring '06 term at Texas A&M.

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Mock Exam 1 Solutions - Solutions Mock Exam I: 1.- E 2.- B...

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