INT 202 – ASSOC. PROF. YELDA YÜCEL
Problems about Chapter 2 and 3
Worksheet #1
1. In 2012, the United States imported about 3.1 billion barrels of oil. Perhaps it would be
better for the United States if it could end the billions of dollars of payments to foreigners by
not importing this oil. After all, the United States can produce its own oil (or other energy
products that substitute for oil). If the United States stopped all oil imports suddenly, it would
be very disruptive. But perhaps the United States could gain if it gradually restricted and then
ended oil imports in an orderly transition. If we allow time for adjustments by U.S. consumers
and producers of oil, and we perhaps are optimistic about how much adjustment is possible,
then the following two equations show domestic demand and supply conditions in the
United States:
where quantity Q is in billions of barrels per year and price P is in dollars per barrel.
a. With free trade and an international price of $100 per barrel, how much oil does the United
States produce domestically? How much does it consume? Show the demand and supply
curves on a graph and label these points. Indicate on the graph the quantity of U.S. imports
of oil.
b. If the United States stopped all imports of oil (in a way that allowed enough time for
orderly adjustments as shown by the equations), how much oil would be produced in the
United States? How much would be consumed? What would be the price of oil in the United
States with no oil imports? Show all of this on your graph.
c . If the United States stopped all oil imports, which group(s) in the United States would
gain? Which group(s) would lose? As appropriate, refer to your graph in your answer.
2. Consider Figure 2.3, which shows free trade in motorbikes. Assume that consumers in the
United States shift their tastes in favor of motorbikes. And assume you US is a small country.
What is the effect on the U.S. domestic demand and/or supply curve(s)? What is the effect on
the equilibrium international price?
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3. Consider a two-country world. Each country has an upward-sloping national supply curve
for raisins and a downward-sloping national demand curve for raisins. With no trade in
raisins, the no-trade equilibrium price for raisins in one country would be $2.00 per kilogram
and the no-trade equilibrium price for raisins in the other country would be $3.20 per
kilogram. If the countries allow free trade in raisins, explain why $3.50 per kilogram cannot be
the free-trade equilibrium world price for raisins.
In your answer, draw and refer to graphs of supply and demand curves for the two national
markets.
4. You are given the information shown in the table about production relationships in
Pugelovia and the rest of the world.
You make several Ricardian assumptions: These are the only two commodities, there are
constant ratios of input to output whatever the level of output of rice and cloth, and
competition prevails in all markets.
a. Does Pugelovia have an absolute advantage in producing rice? Cloth?
b. Does Pugelovia have a comparative advantage in producing rice? Cloth?
c. If no international trade were allowed, what price ratio would prevail between rice and
cloth within Pugelovia?
d. If free international trade is opened up, what are the limits for the equilibrium
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international price ratio? What product will Pugelovia export? Import?
5. Vintland has 30 million hours of labor in total per year. Moonited Republic has 20 million
hours of labor per year.
a. Which country has an absolute advantage in wine? In cheese?
b. Which country has a comparative advantage in wine? In cheese?
c. Graph each country’s production-possibility curve. Show the no-trade production point for
each country, assuming that with no trade Vintland consumes 1.5 million kilos of cheese and
Moonited Republic consumes 3 million kilos of cheese.
d. When trade is opened, which country exports which good? If the equilibrium international
price ratio is ½ bottle of wine per kilo of cheese, what happens to production in each
country?
e. In this free-trade equilibrium, 2 million kilos of cheese and 1 million bottles of wine are
traded. What is the consumption point in each country with free trade? Show this graphically.
f. Does each country gain from trade? Explain, referring to your graphs as is appropriate.
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