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Sample Midterms suggested solutions

Sample Midterms suggested solutions - Sample Midterms...

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Sample Midterms Suggested Solutions Pedro Castro [email protected] March 13, 2010 MIDTERM 1 PART I QUESTION 1 This question is a bit strange. In principle, it is FALSE because it started saying that US is well- endowed in capital and labor scarce but then mention skill-intensive goods and labor intensive goods while it did not say anything about the relative endowment of skilled and unskilled labor in the °rst place. However, if we consider that the expression "the price of skill-intensive goods" was a typo and substitute it with "the price of capital-intensive goods" then everything is correct expect the af°rmative that "all sectors will become more capital-intensive" (actually, the opposite happens; see bottom graph in page 60); so it is FALSE anyway. QUESTION 2 FALSE; there was an increase in the supply of unskilled labor relative to skilled labor and this contributed to an increase in inequality (among other things). QUESTION 3 FALSE; Krugman says that high productivity is good but not because it helps to compete with other countries. He emphasizes that trade is not about competition but about mutual gain. QUESTION 4 Just show that it is possible to expand the consumption possibility frontier with some trade con°guration. Under autarky we have p BR T V p BR w = 60 and p JP T V p JP w = 40 . Assume the free trade relative 1
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price is p T V p w = 50 and that Japan specializes in TV while Britain specializes in whiskey. Then we can show the consumptiuon possibility frontier expanded for both countries, meaning they gained from trade (I leave the graphs for you).
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