Question 1
Suppose Mike and Johnson produce two products-hamburgers and T-shirts. Mike produces 10 hamburgers or 3 T-shirts a day and Johnson produces 7 hamburgers or 4 T-shirts. Assuming they can devote time in making either hamburgers or T-shirts
- Draw the production possibility curves
- Who enjoys the absolute advantage of producing both?
- Who has higher opportunity cost of making T-shirts?
- Who has a comparative advantage in producing hamburgers?
Question 2
Suppose two economies H and F produce two goods, X and Y, with only one input: labour. Production technology implies that unit labour requirements are given in the following table:
| amount of labour per unit of output |
X | Y |
| H | 6 | 12 |
| F | 4 | 2 |
Suppose that H has 2400 units of labour and F has 1800 units of labour.
(a) Derive the Production Possibilities Frontier (PPF) for H and F. What is the autarky equilibrium price ratio in each country?
(b) What is the range of feasible equilibrium world price ratios?
(c) Suppose these countries trade with each other at some feasible world price ratio. Which country exports good X? Why?
(d) Does trade equalize the real return to labour in Home and Foreign? Why?
Question 3
Consider two countries (Home and Foreign) that produce goods 1 (with labour and capital) and 2 (with labour and land) according to the production functions listed below (Table 1 and Table 2). Initially, both countries have the same supply of labour (100 units each), capital, and land. The capital stock in Home then grows. This change shifts out both the production curve for good 1 as a function of labour employed (Table 1) and the associated marginal product of labour curve (Table 2). Nothing happens to the production and marginal curves for good 2.
- Show how the increase in the supply of capital for Home affects its production possibility frontier.
- Draw the relative supply curve for both the Home and the Foreign economy.
- If those two economies open up to trade, what will be the pattern of trade (i.e., which country exports which good)?
- Describe how opening up to trade affects all free factors (labour, capital, land) in both countries.
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