Homework 1 Answer

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

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ECON 460 – 001, 002 Homework 1 due on September 3, 2010 Question 1: The following table shows the hours of labor required to produce 1 unit of each commodity in each country: Wheat Clothing United States 3 hr 9 hr United Kingdom 4 hr 4 hr a. Which country has an absolute advantage in Wheat? Clothing? Comparative Advantage in Wheat? Clothing? Explain. (8 points) Absolute Advantage: US for Wheat and UK for Clothing. Lower labor requirements for the good when compared to the other country. Comparative Advantage: US for Wheat and UK for Clothing. Opportunity cost is lower. Opportunity cost for Wheat is 1/3 clothing in the US while it is 1 clothing in UK. Opportunity cost for Clothing is 3 wheat in the US and 1 wheat in UK. b. If trade takes place between the UK and the US at a barter price of 1 clothing for 2 Wheat, why does each country gain from trade? (5 points) The autarky price for clothing in UK is 1 wheat while it is 3 wheat in the U.S. At a price of 1 C = 2 W, US will save resources by importing cloth and profit when it exports wheat while UK will profit by exporting cloth and save by importing wheat.
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