1. Imagine there are two countries, A and B, and one single good. There is free trade
between A and B. There is only labor, and the MP L is 2 in A and 20 in B (MP LA = 2,
MP LB = 8). What is the relative wage wA=wB in equilibrium? Give an intuitive
interpretation of this result. Answers available here: http://bit.ly/2PRgwTX
2. An economy has an endowment of three goods: Qa = 10, Qb = 30, Qc = 100. It has
CobbDouglas preferences as follows: U = Ca0:2Cb0:4Cc0:4. The international prices
are Pa∗ = 4, Pb∗ = 2, P∗ c = 1. What is the economy’s consumption of each of the
goods if there is trade? How does consumption change relative to autarky? What are
the trade flows? Give an explanation of the changes in consumption that occur as the
economy opens up to trade. Answers available here: http://bit.ly/2PRgwTX
3. Imagine two countries, Home and Foreign, and two goods a and b, with MP La = 10,
MP Lb = 5, MP L∗ a = 100 and MP L∗ b = 25 (with ∗ for Foreign). What is the range for
the wage of Home relative to that in Foreign? Answers available here:
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4. Imagine two countries, A and B, with two goods, 1 and 2. Labor is the only factor of
production. The total amount of labor is 100,000 in A and 2 million in B. The MPL of
country A or B in goods 1 or 2 is MP LA 1 = 2, MP LA 2 = 4, MP LB 1 = 1 and MP LB 2 =
3. Imagine that countries A and B establish a free trade agreement. A comentator in
country A writes the following in the newspaper at the one year aniversary of the start
of the free trade agreement: \The fact is that over the past year we have lost 20,000
jobs in the sector of good 2. That is 20% of our workforce losing their jobs in one
single year. Clearly this trade agreement has been bad for the country." Write a short
paragraph reacting in detail about this statement. Answers available here:
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5. For the same example as in the previous question, explain why the international
relative of good 2 cannot be equal to 2/3. Answers available here:
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6. Imagine an economy (call it Home) with two goods: a and b. Labor is the only factor
of production with MP La = 3 and MP Lb = 1. The international relative price of good
b in terms of good a is 2. Imagine that some workers are \trapped in sector b". What
would happen to workers in sector b once the country goes from autarky to free trade?
Are they better off or worse off? Give an intuitive explanation. Answers available
here: http://bit.ly/2PRgwTX
7. Suppose country A produces shoes (s) and bananas (b). The production of shoes
requires labor and capital, whereas the production of bananas requires labor and land.
Both the production function of bananas and the one of shoes satisfy constant returns
to scale and diminishing marginal returns to each input separately (the standard case).
Because of opening to trade, the relative price of shoes falls. (i) What happens to the
allocation of labor between industries? What happens to the wage in terms of shoes?
Is this sufficient to conclude that workers are better off or worse off? Explain your
intuition in words and with a graph. (ii) Are capital owners better off or worse off?
Explain. (iii) Are land owners better off or worse off? Explain.
8. The country Meeren has 100 workers and 150 units of capital that are perfectly
mobile across sectors. Suppose production for two goods, A and B, is given by the
following: Answers available here: http://bit.ly/2PRgwTX
YA = L
35A
K
25A
YB = L
15B
K
45B
Meereen is a small country engaged in international trade. Factor prices are such that
wr = 3 2
a. What is the allocation of labor to A and B? Answers available here:
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b. Imagine that there is war that kills 70 workers and destroys 70 units of capital. What
is the new allocation of labor to the two industries?
c. How does your answer in (b) relate to the Rybczynski theorem?