Microeconomics: Principles & Policy
14th Edition
ISBN: 9781337794992
Author: William J. Baumol, Alan S. Blinder, John L. Solow
Publisher: Cengage Learning
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Question
Chapter 21, Problem 2TY
a)
To determine
To find: The price ratio of two commodities.
b)
To determine
To find: The commodity to be imported by each country.
c)
To determine
To find: The price range under which price will fall.
d)
To determine
To prove: The benefit arises due to free trade.
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Students have asked these similar questions
There are two countries Home and Foreign.
Home has 1,200 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.
Foreign has a labor force of 800. Foreign's unit labor requirement in apple production is 5, while in
banana production it is 1.
Suppose world relative demand takes the following form: Demand for apples/demand for bananas
= price of bananas/price of apples
a-b. On the graph to the right:
1.) Using the 3-point curved line drawing tool, draw the relative demand curve. Label the curve
RD.
2) Using the point drawing tool, indicate the equilibrium relative price of apples. Label this point
EQ.
Carefully follow the instructions above and only draw the required objects.
2
Relative price of apples Pa/Pb
0
035
0.75
05
Relative quantity of apples
RS
Assume that Home and Foreign produce only two goods – Cars and Tvs. Home has 400 units of labour available. In Home, the unit labour requirement in car production is 40 and in TV production it is 20. On the other hand, Foreign has 450 units of labour available. Foreign’s unit labour requirement in car production is 75, while in TV production it is 15.
i. Suppose that the number of workers increases from 400 to 800 in Home. Find the new equilibrium relative price. What can you say about the efficiency of world production and the gains from trade between Home and Foreign in this case?
j. Suppose that Home has now 800 workers, but they are only half as productive in both industries as we have been assuming. Consider Foreign to have the initial 450 workers only and the same productivity in both industries. Construct the world relative supply curve and determine the equilibrium relative price. How do the gains from trade compare with those in the case described in problem h.
Refer to Table 1-1
Now, each country spends all 40 hours of its time producing only the good for which it has a comparative advantage.
What is the total output of CHEESE produced by both countries combined now?
Chapter 21 Solutions
Microeconomics: Principles & Policy
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