PS02 - EC 340 Spring 2011 Problem Set 2 1. Here are some...

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Unformatted text preview: EC 340 Spring 2011 Problem Set 2 1. Here are some prices from the grocery store: Bread $2.00 Peanut Butter $3.00 Milk $5.00 Soap $4.00 What is the price of Milk in terms of Bread? What is the price of Peanut Butter in terms of Soap? How many Bread can be traded for 10 Peanut Butter? 2. Consider a Ricardian, two‐good (Snow Boards and MP3 Players) economy with the following data regarding technology and labor supply: Snow Boards produced per worker: 10 MP3 Players produced per worker: 20 Total labor supply: 400 Draw the production possibilities frontier for this economy. 3. Given the information in question 2, what is the equilibrium price of Snow Boards in terms of MP3 Players in the absence of trade? 4. Assume that this economy could trade with the rest of the world at a price of Snow Boards in terms of MP3 Players equal to 4. How many Snowboards and MP3 Players will this economy produce? 5. Given the information in questions 2 and 4, show the consumption possibilities frontier for this economy if it trades with the rest of the world. Compare this frontier to the consumption possibilities frontier if this economy does not trade with the rest of the world. 6. Call the country described in question 2 Home. Consider a second country, called Foreign, with the following information: Snow Boards produced per worker: 2 MP3 Players produced per worker: 12 Total labor supply: 2,000 Which country has an absolute advantage in producing Snow Boards? Which country has a comparative advantage in producing Snow Boards? Which has an absolute advantage in producing MP3 Players? Which has a comparative advantage in producing MP3 Players? 7. Suppose that labor is reallocated within each of the two countries to produce more of one good and less of another. The table below shows the change in the production of each of the two goods in each of the two countries, as well as the total world change in production. Finish filling out the table. Snow Boards MP3 Players Change in Home +40 Change in Foreign +120 Change in World ...
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