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# ps2ansA - ECONOMICS 450 INTERNATIONAL TRADE FALL 2011 MARK...

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ECONOMICS 450: INTERNATIONAL TRADE FALL 2011 MARK MOORE PROBLEM SET 2: SOLUTIONS (PART A) A. 1. a. a LA =3; a LB =2 1200=3Q A + 2 Q B Q B =600 – (3/2)Q A Q B 600 slope=-3/2 400 Q A b. opportunity cost of apples in terms of bananas = a LA /a LB = 3/2 c. In the closed economy, P A /P B = 3/2. If P A /P B > 3/2, only apples would be produced. If P A /P B < 3/2, only bananas would be produced. 2. a. a* LA =5; a* LB =1 800=5Q* A + Q* B Q* B =800 – 5 Q* A Q* B 800 slope = -5

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160 Q* A b. P A /P B 5 RS 3/2 1/2 (Q A +Q* A )/(Q B +Q* B ) (=400/800) 3. a. Q A /Q B = P B /P A = 1/( P A /P B ) Note that if Q A /Q B = 1/2, then P A /P B =2. P A /P B 5 RS 2 RD 3/2 1/2 (Q A +Q* A )/(Q B +Q* B ) b. Equilibrium: P A /P B =2 c. Home makes only apples. Foreign makes only bananas. d. Before trade, Home was capable of producing 600 bananas. With trade, Home can trade its 400 apples for 800 bananas. 2
Q B Home can consume along the dotted line, which lies to the right of its PPF slope = -2 slope=-3/2 PPF Q B Before trade, Foreign was capable of producing 160 apples. After trade, it can trade its 800 bananas for 400 apples.

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ps2ansA - ECONOMICS 450 INTERNATIONAL TRADE FALL 2011 MARK...

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