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3610 PS1 solution

3610 PS1 solution - Cornell University Fall 2009 Economics...

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Cornell University Fall 2009 Economics 3610: Problem Set 1 Solutions 1. True/False/Explain. For each of the following statements, say whether the statement is true or false and explain your answer. Please limit your answer to two sentences. a. In a world with two countries and two goods, it is possible for a country to have an absolute advantage in the production of both goods and for there to be no gains from trade possible. True. It may be that the opportunity costs are the same in both countries. b. In a world with two countries and two goods, if the (constant) marginal product of labor is the same for one of the goods in both countries, then there can be no gains from trade. False. If the marginal products of labor for the other good differs, then one of the countries will have a comparative advantage in producing the good. c. If a country has a comparative advantage in producing a good, it must also have an absolute advantage in producing that good. False. A country has a comparative advantage in producing a good if the opportunity cost is lower in terms of the other output. This can be the case even when the country requires more inputs to make a given level of output than another country. d. In the Ricardian model, there are no losers from trade. True. Whether analyzed from the country level or the worker level, the autarky levels of consumption can either be consumed or improved upon. e. If in a trade equilibrium the real wage in one country is higher than that of the other country in terms of one of the goods, then it is higher in terms of the other good as well. True. If a worker in one country can afford more of one good at international trade prices, then the worker could also afford more of the other good.
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