ps1-eco101-10f

ps1-eco101-10f - Economics 101 — Fall 2009 International...

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Unformatted text preview: Economics 101 — Fall 2009 International Trade Problem Set 1 September 29, 2009 Due: Thu, October 15, before 12:30p Instructor: Marc-Andreas Muendler E-mail: [email protected] 1 Ricardian Trade Theory and Specialization Home (no asterisk) and Foreign (asterisk) produce cheese and wine with the following unit labor requirements Home Foreign Cheese a LC = 5 a * LC = 6 Wine a LW = 2 a * LW = 6 Home and Foreign have total labor forces of L = 100 and L * = 200 workers. • Production possibility frontiers . Graph each country’s production possi- bility frontier and calculate the opportunity costs of cheese in terms of wine (the amount of wine a country needs to sacrifice to obtain cheese). Which country has an absolute advantage in cheese production, which in wine production? Which country has a comparative advantage in cheese production, which in wine production? • Autarky . Using the graph from your preceding answer, draw each coun- try’s consumption possibilities in the absence of trade. Calculate the rel- ative prices of cheese in terms of wine in autarky. • Free trade . Both countries open up to free trade. Graph the relative world supply of cheese ( Q * C + Q C ) / ( Q * W + Q W ) and its response to the relative world price of cheese P C /P W based on the unit labor requirements. Provide specific values for changes to the regime of relative world supply on the axes. World consumers’ demand for cheese relative to wine depends on the rel- ative price of the two goods: ( Q C + Q * C ) / ( Q W + Q * W ) = 6- 5 · P C /P W ....
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This note was uploaded on 10/21/2010 for the course ECON 1530 taught by Professor Ohly during the Spring '10 term at Dartmouth.

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ps1-eco101-10f - Economics 101 — Fall 2009 International...

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