International Political Economy
Problem Set #1
Post your work online, either typed or a photo of hand-done work. You are being graded
for completeness and effort. You can work with classmates, but must write up your own
work.
Economics of International Trade
1. 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 (hint: put apples on the yaxis and bananas on the x-axis).
b. What is the most apples Home can consume?
c. What is the most bananas Home can consume?
d. What is the opportunity cost/price of apples in terms of bananas?
2. There is another country, Foreign, with a labor force of 800. Foreign’s unit
labor requirement in apple production is 5, while in banana production it is 1.
a. Graph Foreign’s production possibility frontier (hint: as before, put apples
on the y-axis and bananas on the x-axis).
b. What is the most apples Foreign can consume?
c. What is the most bananas Foreign can consume?
d. What is the opportunity cost/price of apples in terms of bananas in
Foreign?
3. Assume that the demand for apples and bananas in both Home and Foreign is such
that they negotiate a price that an apple is worth 2 bananas.
a. On two separate graphs, redraw the production possibility frontier for
Home and Foreign if they do not trade (Hint: these graphs will be
identical to those you drew above). Then draw a line showing how much
each country can consume through a combination of production and trade.
(The endpoints will be how much they can consume if they produce one
product and don’t trade at all, and how much they can consume if they
produce one product sell all of it to buy from the other country)
b. What is the most Apples Home can consume with trade?
c. What is the most Bananas Home can consume with trade?
d. What is the most Apples Foreign can consume with trade?
e. What is the most Bananas Foreign can consume with trade?
f. Which country has improved its economic position (in absolute, not
relative, terms) as a result of trade? Why?
4. Repeat the analysis from question 3, but now assume that the international price
for apples in terms of bananas is 4 bananas per apple. (Hint: A country cannot
import more than the other country can produce)
5. BONUS QUESTION: If a country changes its policies from closed to open,
how will this affect economic growth in the short term vs. the long term? Why?
Practice with Simultaneous Games
Find the (Pure Strategy) Nash Equilibrium/a for each of the following (Describe them as
strategy for each player, not as payoffs).
State whether each Nash Equilibrium is Pareto Efficient or not. Explain your reasoning.
1. Scarce dessert resources game
Kid 2
Kid 1
Eat ice cream
Eat cake
Eat ice cream
4, 4
8, 10
Eat cake
10, 8
5, 5
2. Odd Couple game
Felix
Oscar
Clean
Relax
Clean
2, 8
0, 2
Relax
6, 4
8, 0
3. Texting while driving game
Driver 2
Driver 1
Text
Don’t text
Text
-100, -100
1, -1
Don’t text
-1, 1
0, 0