Homework 2 Answer - ECON 460 001 002 Homework 2 due on 1...

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ECON 460 – 001, 002 Homework 2 due on September 15, 2010 1. Consider the following Classical labor requirements: Shoes Wine Italy 6 hr/pr 4 hr/gal Switzerland 8 hr/pr 4 hr/gal (a) What should Italy and Switzerland export? (5 points) Italy should export shoe and Switzerland should export wine. Opportunity Cost Shoes Wine Italy 6/4 = 1.5 Wine 4/6 = 2/3 shoe Switzerland 8/4 = 2 Wines 4/8 = ½ shoe (b) What is the range of the terms of trade? (5 points) For Shoe: 1.5 wine to 2 wines For wine: 0.50 shoe to 0.67 shoe (c) If the wage rate in Italy is € 4/hr and the wage rate in Switzerland is 3.5 francs/hr, and the exchange rate is € 1 = 1 franc, what are the limits to the wage rate in each country, other things being equal? (10 points) * Please note that I am using the relative wage in country 2 to compare with the relative productivity of workers in country 2. Your answer should not be affected if you use W 1 e/ W 2 = a 2j / a 1j instead. Italy is country 2 and Switzerland is country 1 in my answers. W 2 / W 1 e = a 1j / a 2j Since e=1, to find wage rate limits in Italy, W 2 /3.5 = 8/6 W 2 = €4.67 W 2 /3.5 = 4/4 W 2 = €3.5 To find wage rate limits in Switzerland, 4/W 1 = 8/6 W 1 = 3 francs 4/W 1 = 4/4 W 1 = 4 francs (d) What are the exchange rate limits? (5 points) W 2 / W 1 e = a 1j / a 2j

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4/3.5e = 8/6 e = 6/7 1 franc= 6/7 Euros OR 1 Euro = 7/6 francs W 2 / W 1 e = a 1j / a 2j 3.5/4e = 4/4 e = 4/3.5 = 8/7 I franc = 8/7 euros OR €1 = 7/8 francs (e) If the following three commodities are included, what will the export and import pattern be?
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