AEM_230_Problem_Set_1___Fall_2007__Ans_Key_

# AEM_230_Problem_Set_ - AEM/ECON 230 International Trade and Finance Problem Set#1 Question 1(32 points Prof David R Lee Fall 2007 In a two-country

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1 AEM/ECON 230 Prof. David R. Lee International Trade and Finance Fall 2007 Problem Set #1 Question 1 (32 points) In a two-country, two-good world, in which labor is the only (and immobile) input in production, the production cost structure for South Korea and Japan is as outlined in the table below: Output per labor hour Country iPods Televisions South Korea 8 4 Japan 2 2 a. Which country has the absolute advantage in iPod production? Explain. (4 points) South Korea. In South Korea they can make 8 iPods in one labor hour, while in Japan they can only make 2 iPods in one labor hour. b. Which country has the absolute advantage in television production? Explain. (4 points) South Korea. In South Korea they can make 4 televisions in one labor hour, while in Japan they can only make 2 televisions in one labor hour. c. Under autarky, what is the price of an iPod in terms of televisions in South Korea? In Japan? (4 points) South Korea: 1 iPod = 0.5 television (or: P i SK = 0.5 television) Japan: 1 iPod = 1 television (or: P i Jap = 1 television) d. Under autarky, what is the price of a television in terms of iPods in South Korea? In Japan? (4 points) South Korea: 1 television = 2 iPods (or: P t SK = 2 iPods) Japan: 1 television = 1 iPod (or: P t Jap = 1 iPods) e. Which country has the comparative advantage in iPod production? (2 points) South Korea

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2 f. Which country has the comparative advantage in television production? (2 points) Japan g. Suppose that each country has 200 labor hours available for the production of iPods and televisions. What is the maximum amount of iPods or televisions each country can produce? (4 points) South Korea can produce a maximum of 8*200 = 1600 iPods, or a maximum of
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## This note was uploaded on 04/09/2008 for the course AEM 2300 taught by Professor Lee,d.r. during the Fall '06 term at Cornell University (Engineering School).

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AEM_230_Problem_Set_ - AEM/ECON 230 International Trade and Finance Problem Set#1 Question 1(32 points Prof David R Lee Fall 2007 In a two-country

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