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Homework 2

# Homework 2 - ECON 460 001 002 Homework 2 due on 1 Consider...

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ECON 460 – 001, 002 Homework 2 due on January 31, 2011 1. Consider the following Classical labor requirements: Shoes Wine Italy 6 hr/pr 4 hr/gal Switzerland 8 hr/pr 4 hr/gal (a) What should Italy and Switzerland export? (5 points) (b) What is the range of the terms of trade? (5 points) (c) If the wage rate in Italy is € 4/hr and the wage rate in Switzerland is 3.5 francs/hr, and the exchange rate is € 1 = 1 franc , what are the limits to the wage rate in each country, other things being equal? (10 points) (d) What are the exchange rate limits? (5 points) (e) If the following three commodities are included, what will the export and import pattern be? (10 points) Clothing Fish Cutlery Italy 9 hr/pr 3 hr/gal 16 hr/unit Switzerland 10 hr/pr 2.5 hr/gal 15 hr/unit (f) What will happen to the pattern of trade if a transportation charge of 1 hour/commodity is taken into consideration? (10 points) 2. Consider the budget constraint for an individual. Draw a graph to show the following: (i) MU x /MU y < P x /P y (ii) MU x /MU y > P x /P y (iii) MU x /MU y = P x /P y
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