Tute 12answers - Introductory microeconomics ECON1001...

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Introductory microeconomics ECON1001 Semester 1 2010 Tutorial 12 Week 13 Q1 Suppose the production of wheat and strawberries per unit of labour in the United States and Mexico is as follows: Wheat Strawberries Mexico 1 tonne 3 kilos United States 2 tonne 3 kilos (a) Which country has a comparative advantage in wheat production? Why? (b) With free trade between the United States and Mexico, is it possible that 1 tonne of wheat will trade for 1 kilo of strawberries? Why or why not? (c) Suppose the free trade price is 1 tonne of wheat for 2 kilos of strawberries. Draw a diagram indicating the production possibilities curve with and without trade if the United States has 200 million units of labour. What is the maximum amount of wheat the United States can produce? Mexico United States Opportunity Cost of Strawberries .33 Wheat/Strawberry .67 Wheat/Strawberry Opportunity Cost of Wheat 3 Strawberries/Wheat 1.5 Strawberries/Wheat (a) As can be inferred from the above table, the U.S. has a comparative advantage in wheat. In other words, the opportunity cost of wheat is lower in the U.S. than in Mexico. (b) No. If the terms of trade between strawberries and wheat were 1 for 1 there would be no reason for the U.S. to trade. Prior to trade, if the U.S. wanted to produce an additional kilos of strawberries, it had to be willing to give up .67 tonnes of wheat. Having to give up a tonne of wheat instead would only make it worse off. (c) The following diagram shows the tradeoff between wheat and strawberries for the U.S. before and after trade. If the U.S. has 200 million units of labour, then the U.S. will produce 200 million units of wheat.
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United States 0 75 150 225 300 375 450 525 600 0 100 200 300 400 WHEAT (MILLIONS OF TONNES) STRAWBERRIES (MILLIONS OF KILOS) Before trade After trade Q2 What is the shape of the production possibilities curve in problem 1? What does this shape imply about the nature of the tradeoff between wheat and strawberries? Is
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