ECON 4001
Spring 2020
Assignment 1
Due Date: March 25, 2020 (by noon)
Show all your works to get full credits.
Chapter 3: The Ricardian Model
1. Suppose that the resource base in Country X can produce either 100 units of cheese or 300
units of wine. Similarly, suppose that Country Y’s resource base is capable of producing 100
units of cheese or 200 units of wine.
a. The opportunity cost of 100 units of cheese is lower in ___________.
a) Country X
b) Country Y
b. Based on this result, it would be best for Country X to concentrate on good __________.
a) cheese
b) wine
c. Complete the following table to reveal the changes in production if Country X stops
producing cheese while Country Y shifts resources out of its wine industry to concentrate
on cheese.
Units of cheese Units of wine
Country X
Country Y
Total
2. Home has 1,200 units of labor available. It can produce two goods, apples and bananas. The
unit labor requirement in apple production is 3, while in banana production it is 2.
a. What is the opportunity cost of apples in terms of bananas?
b. In the absence of trade, Home will have to produce both apple and banana for itself.
However, it will do so only if
a) the price of apples in terms of bananas exceeds 1.5 bananas per apple.
b) the price of apples in terms of bananas is less than 1.5 bananas per apple.
c) the price of apples in terms of bananas equals 1.5 bananas per apple.
3. The table below contains the unit labor requirements in Foreign and Home for each of two
goods.
Cheese
Wine
Home
1 hour per pound 3 hours per gallon
Foreign 5 hours per pound 4 hours per gallon
a. As long as the world equilibrium relative price of cheese in terms of wine lies between
0.33 and 1.25 gallons, the two countries will specialize, with all Home workers producing
____________.
b. In the post-trade equilibrium, the wage of workers in Home relative to the wage of
workers in Foreign will lie between
a) 1.33 and 5.
b) 0.2 and 5.
c) 0.75 and 1.33.
d) 1 and 4.
4. Home has 1,200 units of labor available. It can produce two goods, apples and bananas. The
unit labor requirement in apple production is 3, while in banana production it is 2.
a. Graph Home’s production possibility frontier (x-axis: bananas, y-axis: apples).
b. What is the opportunity cost of apples in terms of bananas?
c. In the absence of trade, what would be the price of apples in terms of bananas? Why?
5. Home is as described in problem 4. There is now also another country, Foreign, with a labor
force of 800. Foreign’s unit requirement in apple production is 5, while in banana production
it is 1.
a. Graph Foreign’s production possibility frontier (x-axis: bananas, y-axis: apples).
b. Construct the world relative supply curve (x-axis: relative quantity of apples, y-axis:
relative price of apples).
6. Now suppose world relative demand takes the following form: Demand for apples/demand
for bananas = price of bananas/price of apples.
a. Graph the relative demand curve along with the relative supply curve.
b. What is the equilibrium relative price of apples?
c. Describe the pattern of trade.
d. Show that both Home and Foreign gain from trade.
7. The table below contains the unit labor requirements in Home and Foreign for each of five
goods as well as relative productivity advantage of Home. Assume there are no transportation
costs.
a. Fill in the blanks in below.
Good
Home Unit Labor
Requirement (𝑎𝐿𝑖 )
Foreign Unit Labor
∗
Requirement (𝑎𝐿𝑖
)
3
2
18
Cell Phones
Jackets
Laptops
MP3 Players
Sneakers
20
8
8
Relative Home
Productivity
∗
Advantage (𝑎𝐿𝑖
/
𝑎𝐿𝑖 )
4
2
1
4
b. If the relative Home wage (w/w*) = 2:
a) Home produces cell phones, jackets, and laptops and Foreign produces laptops, MP3
players, and sneakers.
b) Foreign produces all products.
c) Home produces all products.
d) Foreign produces MP3 players and sneakers and Home produces cell phones and
jackets.
Chapter 4: The Specific Factors Model
1. Consider two countries (Home and Foreign) that produce goods 1 (with labor and capital)
and 2 (with labor and land). Initially, both countries have the same supply of labor,
capital, and land. The capital stock in Home then grows.
a. Show how the increase in the supply of capital for Home affects its production
possibility frontier.
b. Explain how the increase in the supply of capital for Home affects the relative supply
curve for both the Home and the Foreign economy.
c. If those two economies open up to trade, what will be the pattern of trade (i.e., which
country exports which good)?
d. Describe how opening up to trade affects all three factors (labor, capital, land) in both
countries.
2. When opening up to trade, an economy
a) exports the good whose relative price has decreased and imports the good whose
relative price has increased.
b) exports and imports the good whose relative price has increased.
c) exports the good whose relative price has increased and imports the good whose
relative price has decreased.
d) exports and imports the good whose relative price has decreased.
3. When an economy is open to trade, the relative price of a good is determined by the
a) supply and demand for the world.
b) supply and demand for that economy.
c) relative supply and demand for the world.
d) relative supply and demand for that economy.
4. The fundamental reason why trade potentially benefits a country is that it
a) increases dependence on foreign countries.
b) promotes restoration of natural resources.
c) expands the economy’s choices.
d) guarantees that everyone is better off.