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Unformatted text preview: Name: Student ID: Economics 101 — Fall 2003 International Trade Second Midterm Exam November 6, 2003 Time: 80 minutes Total score: 80 points 1 Comparative Advantage and Trade: 10 minutes Consider a Ricardian trade model. Home and Foreign produce cheese and wine with the following unit labor requirements. Both countries have a total labor force of 1,000 workers. They trade. Home Foreign Cheese a LC = 2 a * LC = 4 Wine a LW = 3 a * LW = 5 • Calculate the opportunity costs of cheese production for Home and Foreign. In which good does Home specialize? • A world price ratio of P C /P W = 3 / 4 is a possible equilibrium. Why? • At P C /P W = 3 / 4, what is the ratio between Home and Foreign wages w/w * ? • Given the large wage difference, should both countries trade? Provide a brief reason for your answer. 1 Name: Student ID: 2 Endowment Changes and Incomes: 10 minutes Consider a Specific-Factor model. Russia produces two goods, oil (petrol) and food, and uses three factors. Oil is produced using capital K and labor L P , but no land. Food is produced from land T and labor L F , but without capital. Labor is completely mobile between sectors ( L P + L F = ¯ L ). • Draw a diagram that shows labor demand, the wage rate and the labor allocation between sectors for Russia. [You may assume any relative world price P P /P F for oil.] • Russia’s government seizes assets of some oil producers and subsequently suffers a sudden withdrawal of international capital. Given world-market prices P P /P F , how...
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This note was uploaded on 10/27/2011 for the course ECON 101 taught by Professor Jacobson during the Fall '03 term at UCSD.
- Fall '03
- Comparative Advantage