Econ 231 Review Exercise 1
Review Exercise
1. Home has 1200 units of labor available. It can produce two goods, apples and bananas. The unit labor requirement in apple production is 3, while in banana production it is 2.
A) Graph home’s production possibility frontier.
B) What is the opportunity cost of apples in terms of bananas?
C) In the absence of trade, what would be the price of apples in terms of bananas? Why?
There is now another country, Foreign, with a labor force of 800. Foreign’s unit labor requirement in apple production is 5, while in banana production it is 1.
D) Construct the world relative supply curve.
Now suppose world relative demand takes the following form: demand for apples/demand for bananas = price of bananas /price of apples.
E) Graph the relative demand curve on your solution to D
F) What is the equilibrium relative price of apples?
G) Describe the pattern of trade.
H) Show that both home and foreign gain from trade.
2. The following table shows the unit labor requirements for producing wine and car in the US and France. Assume there is no wage difference between the two countries, and there is no quality difference for the products that both countries produce.
Wine
Car
U. S
0.5 hour/L
0.1 hour/unit
France
0.8 hour/L
0.2 hour/unit
A) What’s the opportunity cost of producing 10 liters of wine in the US?
B) What’s the opportunity cost of producing 10 liters of wine in France?
C) In which industry does the US enjoy the comparative advantage?
3. Canada is more productive than Mexico in producing both computers and corn, so there is nothing to be gained from international trade between the two countries.
1. Home has 1200 units of labor available. It can produce two goods, apples and bananas. The unit labor requirement in apple production is 3, while in banana production it is 2.
A) Graph home’s production possibility frontier.
B) What is the opportunity cost of apples in terms of bananas?
C) In the absence of trade, what would be the price of apples in terms of bananas? Why?
There is now another country, Foreign, with a labor force of 800. Foreign’s unit labor requirement in apple production is 5, while in banana production it is 1.
D) Construct the world relative supply curve.
Now suppose world relative demand takes the following form: demand for apples/demand for bananas = price of bananas /price of apples.
E) Graph the relative demand curve on your solution to D
F) What is the equilibrium relative price of apples?
G) Describe the pattern of trade.
H) Show that both home and foreign gain from trade.
2. The following table shows the unit labor requirements for producing wine and car in the US and France. Assume there is no wage difference between the two countries, and there is no quality difference for the products that both countries produce.
Wine
Car
U. S
0.5 hour/L
0.1 hour/unit
France
0.8 hour/L
0.2 hour/unit
A) What’s the opportunity cost of producing 10 liters of wine in the US?
B) What’s the opportunity cost of producing 10 liters of wine in France?
C) In which industry does the US enjoy the comparative advantage?
3. Canada is more productive than Mexico in producing both computers and corn, so there is nothing to be gained from international trade between the two countries.