Ch. 7 Problems

Ch. 7 Problems - Chapter 7 Problem 1 and an extra Problem 1...

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Chapter 7 Problem 1 and an extra
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Problem 1 In autarky, the decomposition of food and clothing aggregates reveals they are each produced in ten varieties. Each variety requires 200 units of setup cost. Also, each unit of food variety requires 1 unit of resources and each unit of clothing variety requires 2 units of resources. The autarky output levels are 400 for each variety of clothing and 200 units for each variety of food. With trade, number varieties produced in each industry reduces to 4. If resources are allocated in the same way, how much trade has allowed each industry aggregate to expand? Why do the number of varieties not get cut back to four in each industry before trade?
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Problem 1 Answer In autarky, 4,000 units of resources are used in the production of food and 10,000 units in the production of clothing. After trade, since there are only 4 varieties of each produced, there will be 800 units of each variety of food produced and 1150 units of each of the 4 varieties of clothing produced. Trade allows the economy to produce a limited variety of each good. Since there are fixed costs in the production of a variety, trade thus allows for a smaller fraction of resources to be used in setup costs. In autarky, production cannot be cut back to 4 varieties per good as demand dictated that 10 varieties per good are produced. With trade, the varieties not produced domestically are imported.
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This document was uploaded on 02/10/2012.

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Ch. 7 Problems - Chapter 7 Problem 1 and an extra Problem 1...

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