ECN 340 Solution_to_Ch2_Q1-Q10

ECN 340 Solution_to_Ch2_Q1-Q10 - S005-S016-Ch02-SM.qxd...

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Trade and Technology: The Ricardian Model 1. At the beginning of the chapter there is a brief quotation from David Ricardo, and here is a longer version of what Ricardo wrote: England may be so circumstanced, that to produce the cloth may require the labour of 100 men for 1 year; and if she attempted to make the wine, it might require the labour of 120 men for the same time ....To produce the wine in Portugal, might require only the labour of 80 men for 1 year, and to produce the cloth in the same country, might require the labour of 90 men for the same time. It would therefore be advantageous for her to export wine in exchange for cloth.This exchange might even take place, notwithstanding that the commodity imported by Portugal could be produced there with less labour than in England. Suppose that the amount of labor he describes can produce 1,000 yards of cloth or 1,000 bottles of wine in either country.Then answer the following questions: a. What is England’s marginal product of labor in cloth and in wine, and what is Portugal’s marginal product of labor in cloth and in wine? Which country has absolute advantage in cloth and in wine, and why? Answer: In England, 100 men produce 1,000 yards of cloth, so MPL C 5 1000 / 100 5 10. 120 men produce 1,000 bottles of wine, so MPL W 5 1000 / 120 5 8.3. In Portugal, 90 men produce 1,000 yards of cloth, so MPL * C 5 1000 / 90 5 11.1. 80 men produce 1,000 bottles of wine, so MPL * W 5 1000 / 80 5 12.5. So Portugal has an absolute advantage in both cloth and wine, because it has higher marginal products of labor in both industries than does England. b. Use the formula P W / P C 5 MPL C / MPL W to compute the no-trade relative price of wine in each country. Which country has comparative advantage in wine, and why? Answer: For England, P W / P C 5 MPL C / MPL W 5 10 / 8.3 5 1.2, which is the no-trade relative price of wine (equal to the opportunity cost of producing wine). For Portugal, P * W / P * C 5 MPL * C / MPL * W 5 11.1 / 12.5 5 0.9, which is S-5 2
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the no-trade relative price of wine (equal to the opportunity cost of producing wine).The no-trade relative price of wine is lower in Portugal, so Portugal has comparative advantage in wine, and England has comparative advantage in cloth. 2. Suppose that each worker in the home country can produce three cars or two tele- visions.Assume that Home has four workers. a. Graph the production possibilities frontier for the home country. Answer: See the following Fgure. b. What is the no-trade relative price of cars at Home? Answer: The no-trade relative price of cars at Home is P C / P TV ± 2/3. 3. Suppose that each worker in the foreign country can produce two cars or three tele- visions.Assume that ±oreign also has four workers. a. Graph the production possibilities frontier for the foreign country. Answer: See following Fgure. What is the no-trade relative price of cars in ±oreign?
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ECN 340 Solution_to_Ch2_Q1-Q10 - S005-S016-Ch02-SM.qxd...

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