Solution PS1 - Econ 181 - DIS 103/4, Spring 2010 February...

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Econ 181 - DIS 103/4, Spring 2010 February 24, 2010 Problem Set 1 - Suggested Answers 1. (a) P UK C /P UK W =1 / 3. P US C /P US W =3 / 2. (b) The free trade price will settle between 1 / 3 and 3 / 2. The UK will export cloth and the US will export wheat. (c) Note that the consumption possibility frontier has shifted outward (not in parallel. ..) in both countries, so they are both better o±. Assuming both goods are normal, wheat consumption in the UK increases due to both income and substitution e±ects, whereas the change in cloth consumption in the UK is ambiguous; vice versa for the US. Wages in the UK pre-trade are 1 / 2 cloth (per hour) or 1 / 6 wheat, and post- trade are 1 / 2 cloth or 1 / 3 wheat. Wages in the US pre-trade are 1 / 3 cloth or 1 / 2 wheat, and post-trade are 3 / 4 cloth or 1 / 2 wheat. Consequently, the relative wage in the US is W US /W UK =3 / 2. (d) Post trade, the unit labor cost of producing cloth is 1 unit of cloth in the UK and 9 / 4 units of cloth in the US; the unit labor cost of producing wheat is 1
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This note was uploaded on 05/02/2010 for the course ECON 181 taught by Professor Kasa during the Spring '07 term at University of California, Berkeley.

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Solution PS1 - Econ 181 - DIS 103/4, Spring 2010 February...

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