PROBLEM SET – 1
(Due Date: Monday, May 24th, 1pm)
Please show all your work for full credit. Make sure that all graphs are fully labeled.
Question 1 (12 points)
Suppose that a small tropical country produces mangoes for domestic consumption and
possibly for export. The total demand and supply curves for mangoes in this country are
given by the following:
Where P is their price and Q the quantity (in tons)
(a) Draw a demand and supply diagram (Make sure that you show the y-axis
intersects for the demand and supply curves)
(b) What is the equilibrium price and quantity in autarky (i.e. without international
(c) Suppose that the price of mangoes in the rest of the world is 45. Will this country
export or import mangoes? If so, how many tons?
Hint: Assume that, with trade, the new price in the small country will be the world
price. Figure out if there is excess demand or excess supply for mangoes at the new
price. This answer whether it will be exporting / importing mangoes.
Question 2 (30 points)
Suppose world is made up 2 countries, and each country produces 2 goods, TV and
cars, and each country has a labor force of 200 workers. The Countries’ unit labor
requirements for these goods are given below,
Assuming constant opportunity cost,
Country A 2 10
Country B 5 8
Using the theory of absolute and comparative advantage, answer the following
(a) What should Country A export? Explain
(b) Show the PPF for Country B (Make sure that you show the values of the x-axis
and y-axis intersects. Place TVs on the x-axis)
(c) Show the PPF for Country A (Make sure that you show the values of the x-axis
and y-axis intersects)
(d) “After the countries open up to trade, each country produces only the goods that it
exports” Is this argument true or false and explain. (Hint: State the assumption
that supports or dismisses the above statement)
(e) What will be the world production in autarky and trade for each good? Assume
that before trade each country allocates 100 of its workers in the production of
each good. Show all your work.
Question 3 (18 points)
U.S 4 1
U.K 1 2
The numbers in the table represent unit labor requirements.
Total labor endowment=100 hours for each country.
a) Plot the Production Possibilities Frontiers (PPF) for both U.S and U.K(in separate
diagrams, put chips in the x-axis and yachts in the y-axis. Show the y-axis and xaxis
b) What is the autarky price of yachts to chips (Py/Pc) in each country.
c) Assume that the free trade price (Py/Pc) is 1. Show graphically the autarky and
free trade equilibrium points (production and consumption) for both countries.(Do
separate graphs: one for the U.S and one for the U.K. Put chips in the x-axis and
yachts in the y-axis.
Question 4 (20 points)
Question 5 (20 points)
In Home and Foreign, there are two factors each of production, land, and labor used to
produce only one good. The land supply in each country and the technology of
production are exactly the same. The marginal product of labor in each country depends
on employment as follows: If the number of workers employed is L, then the marginal
product of the last worker is (31 – L). Initially there are 11 workers employed in Home,
but only 5 workers in Foreign.
(a) Find the effects of free movement of labor from Home to Foreign in employment,
production, real wages, and the income of landowners in each country.
(b) Assume now that Foreign limits immigration, so that only three workers can move
there from Home. Calculate how the movement of these three workers affects the income
of five different groups: i) Workers who were originally in Foreign ii) Foreign
landowners, iii) Workers who stay in Home, iv) Home landowners, v) The workers who
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