Ps1ans - The following pages contain Problems followed by...

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ECO 340 ANSWERS TO PROBLEM SET 1 Due 9/21 (STUDY GUIDE CHAPTER 3) Chapter 3 Truemalse 1. True: that was David Ricardo's point. A country is a low opportunity cost producer of at least one good. 2. False. That was Ricky Ricardo. 3. False; it is the abundance of land relative to other factors that matters (((i.e. how much land/person) 4. True. 5. True. Multiple Choice D 2. D 3. A 4. A 5. B Problems 1 a. Leinster has an absolute advantage in both goods since it takes less labor to make bread and less labor to make telephones than in Saxony. b. Leinster has a comparative advantage in telephones; in Leinster. the price of one telephone is 513 of a bread loaf (per . while in Saxony the price of one telephone 1s 5 loaves of bread. At the same time Saxony has a comparative advantage in bread: in Saxony, the price of one loaf is 115 telephone, while in Leinster the price of one loaf of bread is 315 telephone. c. With free trade the intematlonal price will fall somewhere between the two pre-trade prices. Thus, 513 loaf i one telephone I five loaves, and 1'5 telephone I one loaf I 315 telephone. (You might look back to problem 2.1: the trade price turned out to be 114 telephone per loaf of bread.) d. If trade 1s stopped the prlces In each country revert to their pre-trade levels 2. a. The ratio of land to labor in Leinster is 8 million acres to 2 million laborers or 4: 1. The ratio in Saxony is 2 mllllon acres to 400,000 laborers or 5.1. Therefore, although Saxony has absolutely fewer acres of land than Leinster. Saxony 1s "land abundant." Lelnster is the "labor abundant" country smce ~t has one laborer for each four acres. b. Telephones are labor-intensive goods; bread is land-intensive. According to H-0, then, Leinster will export telephones and import bread: Saxony will export bread and import telephones.
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Figure S3.3 4 Beer lovers I \ Beer lovers The PPCs of the two countries can be represented by the one drawn. The country with tastes skewed
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