Trade Exam Question (1)

# Trade Exam Question (1) - Put food on the y-axis(f Suppose...

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1 Trade Exam Question Question 1 (38 points): Consider two countries about to trade. The two countries are going to trade food for manufacturing goods. You have the following data for both countries. It takes Country A 6 hours to produce one unit of food and 4 hours to produce one manufactured good. It takes Country B 3 hours to produce one unit of food and 6 hours to produce one manufactured good. (a) Fill in the following table, computing the opportunity cost of production of each good for each person (be sure to include units): Food Manuf. Goods Country A Country B (b) Who has the absolute advantage in the production of food? Why? (c) Who has the comparative advantage in the production of food? Why? (d) Consider the price of food in terms of manufactured goods. What is the highest price at which food can be traded that would make both countries better off? What is the lowest price? Explain.

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2 (e) Graph the production possibilities frontier for Country A in a 24 hour day.
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Unformatted text preview: Put food on the y-axis. (f) Suppose Country A uses 12 hours to produce food and 12 hours to produce manufactured goods. Clearly label the resulting bundle (call it Bundle A ) produced on your PPF in part (e). Specifically how much food and how many manufactured goods are in Bundle A? (g) On the diagram in part (e) label a bundle that has the same amount of food as Bundle A but is unattainable . Call this Bundle B . (h) On the diagram in part (e) label a bundle that has the same amount of food as Bundle A that is attainable AND inefficient . Call this Bundle C . (i) Suppose the price of food in terms of manufactured goods, is one unit of food for 1 manufactured good. If this were the price set, would trade occur? Why or why not? (j) If Country B and Country A were to specialize in production and then trade, what good should Country A specialize in and why?...
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Trade Exam Question (1) - Put food on the y-axis(f Suppose...

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