ECON 5319 - Mid - Spring 2011 - Answer Key

ECON 5319 - Mid - Spring 2011 - Answer Key - ECON 5319 The...

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ECON 5319 The Global Economy Mid-term Exam Answer each question fully. Write neatly. 1. Foodland Production Possibilities at Full Employment Computerland Production Possibilities at Full Employment Food (Billions of Bushels) Point Computers (Millions) Point Food (Billions of Bushels) Computers (Millions) 0 A 3 E 0 4.5 2 B 2 F 1 3 4 C 1 G 2 1.5 6 D 0 H 3 0 a. Draw the production possibility curve for each country using the data provided in the table . b. Which country has an absolute advantage in what product? Which country has a comparative advantage in what product? Show your work! c. Without trade, what is the price of food in terms of computers for both countries? Show your work! d. What is the range of prices (i.e., the price line) at which trade can occur? Also, show (a) the possible price lines for each country and (b) the possible production and consumption possibility lines (consumption curve) for both countries after trade. Show your work! e. What happened to employment? Answers: a. Foodland – for every computer produced must give up 2 food. Computerland – for every computer produced must give up 2/3 food. b. Foodland has absolute and comparative advantage in food and Computerland in computers. c. Foodland: 2 2; 1 F C P == Computerland: 12 . 1.5 3 F C P = = d. 2 0.67. F W P >> e. Foodland specializes in food. This means that the firms and workers engaged in computer production would lose while those engaged in food production would gain. The opposite applies to Computerland. In other words, specialization may inevitably lead to economic restructuring . The losers would complain and may engage in rent-seeking behaviors. Both countries are better off if the benefits outweigh the costs (after specialization). The rent-seeking behaviors would be minimized or eliminated if a mechanism could be found so that the winners could compensate the losers.
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2. Use the information in the table on labor productivities in France and Germany to answer the following questions. Output per Hour Worked France Germany Cheese 2 kilograms 1 kilogram Cars 0.25 0.5 a. Which country has an absolute advantage in cheese? In cars? b. What is the relative price of cheese in France if it does not trade? In Germany, if it does not trade? c. What is opportunity cost of cheese in France? In Germany? d. Which country has a comparative advantage in cheese? In cars? Show how you know. e. What are the upper and lower bounds for the trade price of cheese? f. Draw a hypothetical PPC for France and label its slope. Suppose that France follows its comparative advantage in deciding where to produce on its PPC. Label its production point. If the trade price of cars is 5 kilos of cheese per car, draw a trade line showing how France can gain from trade. Answers: a. France has the absolute advantage in cheese and Germany in cars. This follows because France’s productivity is higher in cheese and Germany’s is higher in cars.
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ECON 5319 - Mid - Spring 2011 - Answer Key - ECON 5319 The...

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