120/30=4 (c) What is the opportunity cost of 1 bookcase in terms of guitars?

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1 Exercise 1 uose you cn roduce one guitr ith 120 hours of lbor or bookcse ith 30 hours of lbor. You re on your F ith stock of 10 guitrs nd 30 bookcses. () Ho mny units of lbor do you hve? From F, e cn get the totl number of vilble hours: 120*10+30*30= =2100 (b) Wht is the oortunity cost of 1 guitr in terms of bookcses? 120/30=4 (c) Wht is the oortunity cost of 1 bookcse in terms of guitrs? 30/120=.25 Consider ech of the folloing trdes sertely. Which ones ould you ccet? [Ti: grh your F nd comute reltive rices for ech of the trdes.] Offer 1 guitr for 10 bookcses 2 guitrs for 10 bookcses 20 bookcses for 6 guitrs 3 guitrs for 10 bookcses 5 bookcses for guitr 5 guitrs for 10 bookcses 8 bookcses for 2 guitrs Accet? Given your F, your criterion ill be to (1) buy bookcses t reltive rice of less thn 0.25 guitrs/bookcse or (2) buy guitrs t reltive rice of less thn 4 bookcses/guitr. Either y you ill be ble to move bove your F. The folloing tble comutes reltive rices to fcilitte decision mking. Offer / G G / Accet? 1 guitr for 10 bookcses No 2 guitrs for 10 bookcses No 20 bookcses for 6 guitrs No 3 guitrs for 10 bookcses Yes 5 bookcses for guitr Yes

2 5 guitrs for 10 bookcses Yes 8 bookcses for 2 guitrs No Exercise 2. There re 2 countries: Richlnd nd oorlnd. Ech orker hs 20 hours of lbor to llocte beteen roduction of bred nd fish. In Richlnd it tkes 1 hour to roduce unit of fish nd 1.5 hours to roduce unit of bred. In oorlnd, it tkes 3 hours to roduce unit of fish nd 2 hours to roduce unit of bred. There re 300 orkers in Richlnd nd 600 orkers in oorlnd. Workers in both countries like to consume sndiches in fixed roortions: one slice of bred to one unit of fish. () Which country hs n bsolute dvntge in the roduction of fish? Richlnd (1<3) (b) Which country hs n bsolute dvntge in the roduction of bred? Richlnd (1.5<2) (c)wht is the oortunity cost of roducing fish in terms of bred in ech country? Richlnd: 1/1.5= 2/3 oorlnd: 3/2 (d)which country hs comrtive dvntge in the roduction of fish? red? Richlnd: fish (2/3<3/2); oorlnd: bred (e) Ho mny sndiches (1 fish + 1 slice of bred) ill be consumed in utrky (ithout interntionl trde) in ech country? Is there reson to secilize ithin country? Richlnd: F+1.5=20 2.5F=20 F==8 er erson oorlnd: 3F+2=20 5F=20 F==4 er erson Totl number of sndiches in utrky: 2400 in Richlnd; 2400 in oorlnd No reson to trde s everyone hs the sme roduction function nd the sme endoment of lbor ithin country. (f) If countries re lloed to trde ht ill be the ttern of seciliztion nd trde? Richlnd: fish oorlnd: bred 20*300=6000 fish 10*600=6000 bred

3 Any reltive rice of fish in terms of bred beteen 2/3 nd 3/2 ill led to seciliztion. (g) uose the orld reltive rice of fish to bred is equl to 1. Determine consumtion of sndiches in Richlnd nd oorlnd (er erson). One ossible outcome is tht reltive rice =1. 5 units of fish re trded for 5 units of bred nd ech Richlnder gets 10 sndiches nd ech oorlnder gets 5. Ech Richlnder trdes ith 2 oorlnders. Question 3 Mexico hs totl suly of lbor hours of 900 nd in hs totl suly of lbor hours of The folloing tble rovides informtion on the unit-lbor requirements in ech country. nns trberries in 10 4 Mexico 6 6. Determine the oortunity cost of bnns in terms of strberries for Mexico nd in. b. In utrky, determine the reltive rices in both countries. Exlin briefly. c. Which country hs comrtive dvntge in roducing strberries? Which country hs bsolute dvntge in roducing strberries? d. Are there ny gins from seciliztion? If so, hich is the ttern of trde? e. In free trde, ht do you kno bout the rice of bnns reltive to strberries? f. uose the reltive rice of bnns is 2. Determine the reltive ges of both countries. Anser 3.. in: Oortunity cost of bnns in terms of strberries = 5/2 roducing n dditionl ound of bnns costs in 5/2 strberries Mexico: Oortunity cost of bnns in terms of strberries = 1 Mking n dditionl ound of bnns costs Mexico 1 ound of strberries.

4 b. in: ince there is lbor mobility beteen sectors ithin country, ges ill equlize cross sectors. Let s denote: ge id to orkers ho roduce bnns ge id to orkers ho roduce strberries rice er ound of bnns rice er ound of strberries L lbor inut requirement in roducing bnns L lbor inut requirement in roducing strberries = L ; = L = = L L = L L = 2 5 Mexico: Using similr rgument s in in s cse, you get * * =1 (I mintin the sme nottion s bove, but dd n * s suerscrit) d. in hs comrtive dvntge in roducing strberries nd Mexico hs comrtive dvntge in roducing bnns. in hs bsolute dvntge in roducing strberries nd Mexico hs bsolute dvntge in roducing bnn. e. ince there re roductivity differences, there re gins from seciliztion. Countries ill secilize nd trde in goods in hich they re reltively more roductive. Therefore, in ill roduce nd exort strberries nd Mexico ill roduce nd exort bnns. f. Let s denote:

5 orld rice er ound of bnns orld rice er ound of strberries 1 5 Otherise, countries ill not be illing to secilize nd trde 2 h. M W L = W M L 2 = 2 * = The ge in in is less thn the ge in Mexico. i. In the bsence of trde, in could roduce 1/10 ound of bnns by foregoing ¼ of ound of strberries using one unit of lbor, nd Mexico could roduce 1/6 ound of strberries by foregoing 1/6 ound of bnns. in could roduce ¼ ound of strberries using one unit of lbor nd trde it on the orld mrket for 1/8 ound of bnns. Mexico could roduce 1/6 ound of bnns using one unit of lbor nd trde it for 1/3 ound of strberries. Ech country is better off ith trde.