homework 2
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econ 313TRANSCRIPT
BUS 313, Spring 2016
Homework #2
1. (Gerber Chapter 3, Question 1) Use the information in the table on labor productivities in France and Germany to answer questions a through f.
Output per Hour WorkedFrance Germany
Cheese 2 kilograms 1 kilogramCars 0.25 0.5
a. Which country has an absolute advantage in cheese?In cars?
France has an absolute advantage in cheese because it produces more cheese per hour worked than Germany. Germany has an absolute advantage in cars because it produces more cars than hours worked compared to France.
b. What is the relative price of cheese in France if it does not trade? In Germany?
France- The relative price of cheese in France is 0.125 cars per one kilogram of cheese.Germany- The relative price of cheese in Germany is 0.5 cars per one kilogram of cheese.
c. What is the opportunity cost of cheese in France? In Germany?
France- The opportunity costs of cheese in France is 0.125 cars per one roll of cheese.Germany- The opportunity costs of cheese in Germany is 0.5 cars per one roll of cheese
d. Which country has a comparative advantage in cheese? In cars? Explain your answer.
France has a comparative advantage in cheese because its opportunity costs are lower than that of Germany.
e. What are the upper and lower bounds for the trade price of cheese?
.5 kilograms(Cheese/Cars) > Pcw > .125 kilograms (Cheese/Cars)
Prof. Jiakai Chen
PPC
CPC
BUS 313, Spring 2016
f. Draw a hypothetical PPC for France and label its slope. Suppose that France follows its comparative advantage in deciding where to produce on its PPC. Label its production point.If the trade price of cars is 5 kilograms of cheese per car, draw a trade line (CPC) showing how France can gain from trade.
2. (Gerber Chapter 3, Question 2) Suppose the table in Problem 1 looks as follows. Use the information to answer questions a through f.
Output per Hour Worked
France Germany
Cheese 1 kilogram 2 kilogramsCars 0.25 car 2 cars
a. Which country has an absolute advantage in cheese? In cars?
France has an absolute advantage in cheese. Germany has an absolute advantage in cars.
b. What is the relative price of cheese in France if it does not trade? In Germany?
France- (.25/1) The relative price of cheese in France is 0.25 cars per one kilo of cheese.Germany- (2/2) The relative price of cheese in Germany is 1 car per one kilo of cheese.
c. What is the opportunity cost of cheese in France? In Germany?
France- The opportunity costs in France are 0.25 cars per one kilo of cheese.Germany- The opportunity costs in France are 1 car per one kilo of cheese.
d. Which country has a comparative advantage in cheese? In cars? Explain your answer.
France has a comparative advantage in cheese because its opportunity costs of producing cheese are low than that of Germany.
e. What are the upper and lower bounds for the trade price of cheese?
8 (cheese/car) > Pcw > 2 (cheese/car)
Prof. Jiakai Chen
Cheese
Cars
Cheese
PPC
CPC
BUS 313, Spring 2016
f. Draw a hypothetical PPC for France and label its slope. Suppose that France follows its comparative advantage in deciding where to produce on its PPC. Label its production point.If the trade price of cars is 5 kilograms of cheese per car, draw a trade line (CPC) showing how France can gain from trade.
3. (Gerber Chapter 3, Question 5) Many people believe that the goal of international trade should be to create jobs. Consequently, when they see workers laid off due to a firm’s inability to compete against cheaper and better imports, they assume that trade must be bad for the economy. Is this assumption correct? Why, or why not?
This is not a correct assumption. The purpose of trade is to give a more effective distribution of resources. Also, even though some firms’ workers are being laid off the market will develop another firm in its place that will be able to hire those workers.
Prof. Jiakai Chen
Cars