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##### Suppose that each worker in the Home country can produce three cars

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Problem Set 1;The Ricardian Model;due Tue 9/14.;Please complete the following problems. Write brief but complete answers.;1. (from FT textbook) Suppose that each worker in the Home country can produce three cars or;two TVs. Assume that Home has four workers.;a. Graph the production possibility frontier for the Home country (place TVs on the;vertical axis);b. What is the no-trade relative price of cars (measured in terms of TVs) at Home?;2. Suppose each worker in the Foreign country can produce two cars or three TVs. Assume that;Foreign also has four workers.;a. Graph the production possibilities frontier for the Foreign country.;b. What is the no-trade relative price of cars in Foreign?;c. Using the information in problem 2 regarding Home, in which good does Foreign;have a comparative advantage, and why?;3. Suppose that in the absence of trade, Home consumes nine cars and two TVs while Foreign;consumes two cars and Nine TVs. Add these consumption points and the corresponding;indifference curve for each country to the figures you drew in problems 2 and 3. Label the;indifference curve U1 in each figure.;4. Now suppose the world relative price of cars is PC /PTV = 1.;a. What good will each country specialize in producing. Briefly explain why.;b. Graph the new world price line for each country in the figures in Problem 4, and add;a new indifference curve (U2) for each country in the trade equilibrium.;c. Label the exports and imports for each country. How does the amount of Home;exports compare with Foreign imports?;d. Does each country gain from trade? Briefly explain why.;(continued on next page);1;5. Determining the world equilibrium price. In the problem above we were told that the world;equilibrium price was PC /PTV = 1 but in general its level is determined in a world market;equilibrium. Read this question to the end before answering part a).;a. Graph Homes export supply of cars (PC /PTV on the vertical, quantity of exported;cars on the horizontal). Hint look at the diagram you drew for Home in problem 4;and calculate export supply (=output of cars demand for cars) at different values of;PC /PTV.;b. Graph Homes export supply of cars (PC /PTV on the vertical, quantity of exported;cars on the horizontal). Hint look at the diagram you drew for Home in problem 4;and calculate export supply (=output of cars demand for cars) at different values of;PC /PTV.;c. Graph Foreigns import demand for cars. (PC /PTV on the vertical, quantity of cars on;the horizontal). Hint look at the diagram you drew for Foreign in problem 4 and;calculate export supply (=output of cars demand for cars) at different values of PC;/PTV.;6. In 1990, the ratio of Japanese to US labor productivity in the steel and consumer electronics;industries were estimated to approximately 1.4 and 1.12. We will assume that (a) these are;the only two industries and labor is the only factor of production, (b) both industries are;characterized by perfect competition, (c) there are no trade restrictions, and (d) that both;countries specialize.;a. What country has the comparative advantage in producing steel and what country has;the comparative advantage in producing electronics? What can you say about the;absolute advantage between the two countries?;b. Based on this info what can you say about the ratio of real-wages (measured in terms;of steel and electronics) between Japanese and US workers in 1990?.;2

Paper#26553 | Written in 18-Jul-2015

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