Econ 601: Basic Economic Analysis Answer Key – Homework #6 Multiple Choice 1.A 2.A 3.C 4.A 5.B 6.A 7.B 8.D 9.C 10.C Problems 1. There is no domestic market for winter coats, yet there is a domestic supply of coats. If the world price is above the minimum price at which the country would supply coats, then in free trade the country would produce and export coats. 2. a. The equilibrium no-trade price is 100; the no-trade quantity is 300. b. At a price of 120, Belgium demands 290 and supplies 400. In free trade Belgium thus exports 110. c. Belgian consumer surplus declines, while Belgian producer surplus increases. The Belgian PS gain outweighs the CS loss, so overall Belgian welfare increases. 3. a.Vietnam has an absolute disadvantage in both goods. Its labor input per unit of output is higher for both goods so its labor productivity is lower for both goods. b. Vietnam has a comparative advantage in rice. Costa Rica has a comparative advantage in cloth. c. With no trade, the relative price of rice would be 75/100 = 0.75 yards of cloth per bushel of rice. d. With no free trade the international equilibrium price ratio will be greater than or equal to 0.75 yards per bushel, and less than or equal to 1.0 yard per bushel (the no-trade price in Costa Rica) 4. Agree – imports permit a country to consume more (or do more capital investment using imported capital goods.) Anything that is exported is not available for domestic consumption (or capital investment). Although this loss is bad, exports are like a necessary evil because exports are how the country pays for the imports that it wants.