1、Chapter 2 1Home 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. aGraph out the production possibilities frontier: bWhat is the opportunity cost of apples in terms of bananas? 5 .
2、 1 Lb La a a cIn the absence of trade, what would the price of apples in terms of bananas be? In the absence of trade, since labor is the only factor of production and supply decisions are determined by the attempts of individuals to maximize their earnings in a competitive economy, only when LbLaba
3、 /aa /PPwill both goods be produced. So1.5 /PP ba 2Home is as described in problem 1. There is now also another country, Foreign, with a labor force of 800. Foreigns unit labor requirement in apple production is 5, while in banana production it is 1. aGraph Foreigns production possibilities frontier
4、: bConstruct the world relative supply curve. 3 Now suppose world relative demand takes the following form: Demand for apples/demand for bananas = price of bananas/price of apples. aGraph the relative demand curve along with the relative supply curve: abba /PP/DD When the market achieves its equilib
5、rium, we have 1 b a )( D D b a b b a a P P QQ QQ RD is a hyperbola x y 1 bWhat is the equilibrium relative price of apples? The equilibrium relative price of apples is determined by the intersection of the RD and RS curves. RD: y x 1 RS: 5 5 , 5 . 1 5 . 1 , 5 . 0( 5 . 0 )5 . 0 , 0 y y y x x x 25 . 0
6、yx 2/bPaP ee cDescribe the pattern of trade. ba b e a e baPPPPPP/ In this two-country world, Home will specialize in the apple production, export apples and import bananas. Foreign will specialize in the banana production, export bananas and import apples. dShow that both Home and Foreign gain from
7、trade. International trade allows Home and Foreign to consume anywhere within the colored lines, which lie outside the countries production possibility frontiers. And the indirect method, specializing in producing only one production then trade with other country, is a more efficient method than dir
8、ect production. In the absence of trade, Home could gain three bananas by foregoing two apples, and Foreign could gain by one foregoing five bananas. Trade allows each country to trade two bananas for one apple. Home could then gain four bananas by foregoing two apples while Foreign could gain one a
9、pple by foregoing only two bananas. So both Home and Foreign gain from trade. 4 Suppose that instead of 1200 workers, Home had 2400. Find the equilibrium relative price. What can you say about the efficiency of world production and the division of the gains from trade between Home and Foreign in thi
10、s case? RD: y x 1 RS: 5 5 , 5 . 1 5 . 1 , 1 ( 1 ) 1 , 0 y y y x x x 5 . 1 3 2 yx 5 . 1/bPaP ee In this case, Foreign will specialize in the banana production, export bananas and import apples. But Home will produce bananas and apples at the same time. And the opportunity cost of bananas in terms of
11、apples for Home remains the same. So Home neither gains nor loses but Foreign gains from trade. 5 Suppose that Home has 2400 workers, but they are only half as production in both industries as we have been assuming, Construct the world relative supply curve and determine the equilibrium relative pri
12、ce. How do the gains from trade compare with those in the case described in problem 4? In this case, the labor is doubled while the productivity of labor is halved, so the effective laborremains the same. So the answer is similar to that in 3. And both Home and Foreign can gain from trade. But Forei
13、gn gains lesser compare with that in the case 4. 6”Korean workers earn only $2.50 an hour; if we allow Korea to export as much as it likes to the United States, our workers will be forced down to the same level. You cant import a $5 shirt without importing the $2.50 wage that goes with it.” Discuss.
14、 In fact, relative wage rate is determined by comparative productivity and the relative demand for goods. Koreas low wage reflects the fact that Korea is less productive than the United States in most industries. Actually, trade with a less productive, low wage country can raise the welfare and stan
15、dard of living of countries with high productivity, such as United States. So this pauper labor argument is wrong. 7 Japanese labor productivity is roughly the same as that of the United States in the manufacturing sector (higher in some industries, lower in others), while the United States, is stil
16、l considerably more productive in the service sector. But most services are non-traded. Some analysts have argued that this poses a problem for the United States, because our comparative advantage lies in things we cannot sell on world markets. What is wrong with this argument? The competitive advan
17、tage of any industry depends on both the relative productivities of the industries and the relative wages across industries. So there are four aspects should be taken into account before we reach conclusion: both the industries and service sectors of Japan and U.S., not just the two service sectors.
18、 So this statement does not bade on the reasonable logic. 8 Anyone who has visited Japan knows it is an incredibly expensive place; although Japanese workers earn about the same as their U.S. counterparts, the purchasing power of their incomes is about one-third less. Extend your discussing from que
19、stion 7 to explain this observation. (Hint: Think about wages and the implied prices of non-trade goods.) The relative higher purchasing power of U.S. is sustained and maintained by its considerably higher productivity in services. Because most of those services are non-traded, Japanese could not be
20、nefit from those lower service costs. And U.S. does not have to face a lower international price of services. So the purchasing power of Japanese is just one-third of their U.S. counterparts. 9How does the fact that many goods are non-traded affect the extent of possible gains from trade? Actually t
21、he gains from trade depended on the proportion of non-traded goods. The gains will increase as the proportion of non-traded goods decrease. 10 We have focused on the case of trade involving only two countries. Suppose that there are many countries capable of producing two goods, and that each countr
22、y has only one factor of production, labor. What could we say about the pattern of production and in this case? (Hint: Try constructing the world relative supply curve.) Any countries to the left of the intersection of the relative demand and relative supply curves export the good in which they have
23、 a comparative advantage relative to any country to the right of the intersection. If the intersection occurs in a horizontal portion then the country with that price ratio produces both goods. Chapter 3 1.In 1986, the price of oil on world markets dropped sharply. Since the United States is an oil-
24、importing country, this was widely regarded as good for the U.S. economy. Yet in Texas and Louisiana 1986 was a year of economic decline. Why? It can deduce that Texas and Louisiana are oil-producing states of United States. So when the price of oil on world markets declined, the real wage of this i
25、ndustry fell in terms of other goods. This might be the reason of economic decline in these two states in 1986. 2。An economy can produce good 1 using labor and capital and good 2 using labor and land. The total supply of labor is 100 units. Given the supply of capital, the outputs of the two goods d
26、epends on labor input as follows: To analyze the economys production possibility frontier, consider how the output mix changes as labor is shifted between the two sectors. a.Graph the production functions for good 1 and good 2. ),(),( 22221111 LKQQLKQQ b.Graph the production possibility frontier. Wh
27、y is it curved? Q1 Q2 L1 L2 PPF ),( 2222 LKQQ ),( 1111 LKQQ 100 100 The PPF is curved due to declining marginal product of labor in each good. The total labor supply is fixed. So as L1rises, MPL1falls; correspondingly, as L2falls, MPL2rises. So PP gets steeper as we move down it to the right. 2.The
28、marginal product of labor curves corresponding to the production functions in problem2 are as follows: a.Suppose that the price of good 2 relative to that of good 1 is 2. Determine graphically the wage rate and the allocation of labor between the two sectors. With the assumption that labor is freely
29、 mobile between sectors, it will move from the low-wage sector to the high-wage sector until wages are equalized. So in equilibrium, the wage rate is equal to the value of labors marginal product. 2/ 122211 PPPMPLPMPL The abscissa of point of intersection illustrated above should be between (20, 30)
30、. Since we only have to find out the approximate answer, linear function could be employed. The labor allocation between the sectors is approximately L1=27 and L2=73. The wage rate is approximately 0.98. b.Using the graph drawn for problem 2, determine the output of each sector. Then confirm graphic
31、ally that the slop of the production possibility frontier at that point equals the relative price. Q1 Q2 L1 L2 PPF ),( 2222 LKQQ ),( 1111 LKQQ 100 100 2 1 slope The relative price is P2/P1=2 and we have got the approximate labor allocation, so we can employ the linear function again to calculate the
32、 approximate output of each sector: Q1=44 and Q2=90. c.Suppose that the relative price of good 2 falls to 1. Repeat (a) and (b). The relative decline in the price of good 2 caused labor to be reallocated: labor is drawn out of production of good 2 and enters production of good 1 (1=62, L2=38). This
33、also leads to an output adjustment, that is, production of good 2 falls to 68 units and production of good 1 rises to 76 units.And the wage rate is approximately equal to 0.74. Q1 Q2 L1 L2 PPF ),( 2222 LKQQ ),( 1111 LKQQ 100 100 1slope 2 1 slope d.Calculate the effects of the price change on the inc
34、ome of the specific factors in sectors 1 and 2. With the relative price change from P2/P1=2 to P2/P1=1, the price of good 2 has fallen by 50 percent, while the price of good 1 has stayed the same. Wages have fallen too, but by less than the fall in P2(wages fell approximately 25 percent). Thus, the
35、real wage relative to P2actually rises while real wage relative to P1falls. Hence, to determine the welfare consequence for workers, the information about their consumption shares of good 1 and good 2 is needed. 3.In the text we examined the impacts of increases in the supply of capital and land. Bu
36、t what if the mobile factor, labor, increases in supply? a Analyze the qualitative effects of an increase in the supply of labor in the specific factors model, holding the price of both goods constant. For an economy producing two goods, X an Y, with labor demands reflected by their marginal revenue
37、 product curves, there is an initial wage of w1and an initial labor allocation of Lx=OxA and Ly=OyA. When the supply of labor increases, the right boundary of the diagram illustrated below pushed out to Oy. The demand for labor in sector Y is pulled rightward with the boundary. The new intersection
38、of the labor demand curves shows that labor expands in both sectors, and therefore output of both X and Y also expand. The relative expansion of output is ambiguous. Wages paid to workers fall. W xx PMPL yy PMPL 1 w 2 w y O y O AB bGraph the effect on the equilibrium for the numerical example in pro
39、blems 2 and 3, given a relative price of 1, when the labor force expands from 100 to 140. With the law of diminishing returns, the new production possibility frontier is more concave and steeper (flatter) at the ends when total labor supply increases. L1increase to 90 from 62 and L2increases to 50 f
40、rom 38. Wages decline from 0.74 to 0.60. This new allocation of labor leads to a new output mix of approximately Q1=85 and Q2=77. Q1 Q2 L1 L2 PPF ),( 2222 LKQQ ),( 1111 LKQQ 140 140 100 100 Chapter 4 1 In the United States where land is cheap, the ratio of land to labor used in cattle rising is high
41、er than that of land used in wheat growing. But in more crowded countries, where land is expensive and labor is cheap, it is common to raise cows by using less land and more labor than Americans use to grow wheat. Can we still say that raising cattle is land intensive compared with farming wheat? Wh
42、y or why not? The definition of cattle growing as land intensive depends on the ratio of land to labor used in production, not on the ratio of land or labor to output. The ratio of land to labor in cattle exceeds the ratio in wheat in the United States, implying cattle is land intensive in the Unite
43、d States. Cattle is land intensive in other countries too if the ratio of land to labor in cattle production exceeds the ratio in wheat production in that country. The comparison between another country and the United States is less relevant for answering the question. 2 Suppose that at current fact
44、or prices cloth is produced using 20 hours of labor for each acre of land, and food is produced using only 5 hours of labor per acre of land. a.Suppose that the economys total resources are 600 hours of labor and 60 acres of land. Using a diagram determine the allocation of resources. 5TF LF /TFLF /
45、QF)(TF / /QF)(LF aTF / aLF 20TC LC /TCLC /QC)(TC / /QC)(LC aTC / aLC We can solve this algebraically since L=LC+LF=600 and T=TC+TF=60. The solution is LC=400, TC=20, LF=200 and TF=40. Labor Land Cloth Food LC LF TC TF b.Now suppose that the labor supply increase first to 800, then 1000, then 1200 ho
46、urs. Using a diagram like Figure4-6, trace out the changing allocation of resources. tion).specializa (complete 0.LF 0,TF 1200,LC 60,TC :1200L 66.67LF 13.33,TF 933.33,LC 46.67,TC :1000L 133.33LF 26.67,TF 666.67,LC 33.33,TC :800L Labor Land Cloth Food 0l8000l10000l1200 c.What would happen if the labo
47、r supply were to increase even further? At constant factor prices, some labor would be unused, so factor prices would have to change, or there would be unemployment. 3.“The worlds poorest countries cannot find anything to export. There is no resource that is abundant certainly not capital or land, a
48、nd in small poor nations not even labor is abundant.” Discuss. The gains from trade depend on comparative rather than absolute advantage. As to poor countries, what matters is not the absolute abundance of factors, but their relative abundance. Poor countries have an abundance of labor relative to c
49、apital when compared to more developed countries. 4.The U.S. labor movement which mostly represents blue-collar workers rather than professionals and highly educated workers has traditionally favored limits on imports form less-affluent countries. Is this a shortsighted policy of a rational one in v
50、iew of the interests of union members? How does the answer depend on the model of trade? In the Ricardos model, labor gains from trade through an increase in its purchasing power. This result does not support labor union demands for limits on imports from less affluent countries. In the Immobile Fac
