HW1_Answer key - ECON 178: International Trade Spring 2009...

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ECON 178: International Trade Spring 2009 Assignment #1 Answer Key Question 1 (a) The opportunity cost of cheese in terms of wine is equal to the slope of the country’s PPF. / 40 2 / 20 LC LW LW LC a L a a L a = = = * * * * * * / 50 1 / 50 LC LW LW LC a L a a L a = = = Home has a higher opportunity cost of cheese in terms of wine, therefore Home has a comparative advantage in wine and Foreign has a comparative advantage in cheese. It is clear from the graph that Foreign has an absolute advantage in both cheese and wine: with the same amount of labor (L=L*) , Foreign can produce more wine than Home { * * * LW LW LW LW L L a a a a < } and more cheese than Home { * * * LC LC LC LC L L a a a a < }. (b) If Home and Foreign are trading, each will specialize in a good in which it has comparative advantage and the free trade price T c w P P will settle somewhere in between the opportunity costs of cheese in terms of wine: 1 2 T c w P P < < . (c) * * C C W W Q Q Q Q + + * * / 50 1.25 / 40 LC LW L a L a = = C W P P * * 1 LC LW a a = 2 LC LW a a = RS
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(d) Given that L=L*=200, we can find unit labor requirements for both countries: 10 LC a = , 5 LW a = and * 4 LC a = , * 4 LW a = . Let 3 2 T c w P P = (can be any number between 1 and 2).
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HW1_Answer key - ECON 178: International Trade Spring 2009...

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