Homework 1 Answer

Homework 1 Answer - ECON 460 001, 002 Homework 1 Answer...

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ECON 460 – 001, 002 Homework 1 Answer 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. c. Let us suppose that UK has 500 hours of labor available 300 of which are used to produce clothing and the remaining 200 to produce wheat. What is the output of each of these goods in autarky? (5 points)
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This document was uploaded on 10/28/2011 for the course ECON 460 at UNC.

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Homework 1 Answer - ECON 460 001, 002 Homework 1 Answer...

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