Problem 1 1. Assume that the world economy is composed of only two countries (Canada and the United States) and only two goods (steel and wheat). The table below reports the units of labor needed to produce a ton of steel or of wheat in Canada and in the United States. Canada United States Units of labor per ton of steel 18 10 Units of labor per ton of wheat 6 4 a) What is the opportunity cost of steel and of wheat in Canada? In the United States? b) Which country has a comparative advantage in which good? Why? Assume that Canada and the United States currently are completely specialized according to comparative advantage. Each country trades with the other to acquire the good in which it has a comparative disadvantage. c) Now assume that it becomes politically unpopular in both Canada and the United States to be “dependent” on the other country for a good as important as steel or wheat. Canada decides to move 3 units of labor out of its comparative advantage industry and into the comparative disadvantage industry, and the United States 2 units of labor. By completing the table below, show the changes in production of steel and wheat that result from the change in trade policy. Canada United States Total (C+US) Change in steel production ________ ________ ________ Change in wheat production________ ________ ________ Currently there are 1,800 workers in Canada and 2,000 in the United States. Carefully draw the production possibility curves for Canada and the United States. Please put steel on the vertical axis and wheat on the horizontal axis. Write numerical values for all intercepts. Are the curves bowed out? Explain. e) Draw the production possibilities curve for Canada and the United States combined. Write numerical values for all intercepts and kink points. Explain why this curve is not linear and why it is shaped the way it is. 2. Consider the following information regarding production technologies in two countries: Labor days needed to build one boat Labor days needed to build one sewing machine Bolivia Argentina 100 200 2 20 a. Which country has a comparative advantage in the production of boats; of sewing machines? Explain your answer with reference to opportunity costs. b. Which country has an absolute advantage in the production of boats; of sewing machines? Explain your answer. c. Describe the range for the price of boats (in terms of sewing machines per boat) within which both countries will be willing to trade. Explain why trade won’t take place if the price of boats is above this range. d. Show that trade increases Bolivian consumption of boats and/or sewing machines as long as the price of boats does not equal the pre-trade price of boats in Bolivia. e. Does trade increase consumption of boats and/or sewing machines in Argentina if the price of boats equals the pre-trade price of boats in Bolivia? 3. Suppose that each year, Amherst College can produce two types of graduates: Fuzzies (eg., music majors) and Techies (eg., physics majors). The following table describes the college’s production possibilities. Fuzzies 300 275 250 225 175 100 0 Techies 0 100 175 225 250 275 300 a. draw and label the college’s Production Possibilities Frontier (PPF) (hint: use a scale of 1 square per 25 students; don’t forget to label the axes) b. For each of the following combinations, mark them on the graph and say whether they are efficient, inefficient, or impossible: A: 250 fuzzies & 275 techies: _________________________ B: 150 fuzzies & 200 techies: _________________________ C: 100 fuzzies & 275 techies: _________________________ c. Given its production possibilities, if the college wants to maximize total tuition income (ie., the number of students), how many techies and how many fuzzies will it produce? _____________________________ d. In what units would you measure the opportunity cost of adding a Fuzzie? ____________________________ e. e. What are the opportunity costs of an additional 50 Fuzzie Students if the college is producing efficiently and the current number of Fuzzie students is: 175? __________________________ 250? __________________________ Explain why the opportunity costs of an additional Fuzzie are greater when the total number of Fuzzies is greater ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ f. Sketch what might happen to the PPF if the college hires 10 more music professors and fires 10 physics professors.