Homework 1 Solutions

Homework 1 Solutions - Homework 1 Name Purdue ID Part 1....

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Homework 1 Name Purdue ID
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Part 1. Questions that you do not need to turn in. Answer the following questions. You do not need to turn them in. Study Guide, Chapter 1, problems 1 ~ 5. Study Guide, Chapter 2, problems 1 ~ 8. (Problem 1 includes 1a through 1i, etc.)
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Part 2 I. Consider the Ricardian model. Given the following information: MPL MPL Labor Endowments Cloth Computers Mexico 0.1 0.04 50 Singapore 1 2.5 20 2 points each. 16 points total. (1) Which country has an absolute advantage in cloth? Why? Answer: Singapore. It has a higher marginal product of labor. (2) Which country has a comparative advantage in computers? Why? Answer: Opportunity cost of computers = 0.1/0.04 = 2.5 in Mexico, and 1/2.5 = 0.4 in Singapore. So Singapore has a comparative advantage in computers. (3) What is the real wage of Mexican workers in terms of computers before trade? Answer: Mexican workers’ real wage = MPL computers = 0.04. (4). If these two countries trade, then what is the lower limit of the free-trade equilibrium price of computers in terms of cloth? What is the upper limit? Answer: The free trade relative price lies between the opportunity costs. Since the opportunity cost of computers is 2.5 in Mexico and 0.4 in Singapore, the free trade relative price of computers lies between 0.4 and 2.5. (5) What does Mexico export under free trade? Why? Answer: By the answer to Q(4), Singapore has a comparative advantage in computers and
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Homework 1 Solutions - Homework 1 Name Purdue ID Part 1....

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