Suppose that US and Canada both produce steel and automobiles. Both countries face constant marginal cost conditions (i.e., straight line PPFs). US can produce a maximum of 1000 tons of steel or a maximum of 500 automobiles when it uses all its inputs to produce one or the other good. Canada can produce a maximum of 2000 tons of steel or 400 automobiles. In autarky, US produces 500 tons of steel and 250 autos. Canada produces 1000 tons of steel and 200 autos. a) Which country has a comparative advantage in production of autos? b) What will be the production gains when these countries start trading? c) Suppose the countries trade at the terms of trade given by 1 auto: 3 tons of steel. Also suppose that the US continues to consumer 250 autos. How many autos will the US export and how many tons of steel would it receive? d) Find the consumption gains from trade for both countries.

Suppose that US and Canada both produce steel and automobiles. Both countries face constant marginal cost conditions (i.e., straight line PPFs). US can produce a maximum of 1000 tons of steel or a maximum of 500 automobiles when it uses all its inputs to produce one or the other good. Canada can produce a maximum of 2000 tons of steel or 400 automobiles. In autarky, US produces 500 tons of steel and 250 autos. Canada produces 1000 tons of steel and 200 autos. a) Which country has a comparative advantage in production of autos? b) What will be the production gains when these countries start trading? c) Suppose the countries trade at the terms of trade given by 1 auto: 3 tons of steel. Also suppose that the US continues to consumer 250 autos. How many autos will the US export and how many tons of steel would it receive? d) Find the consumption gains from trade for both countries.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Concept explainers

Cost of Production

The entire idea of the cost of production or production cost is applied corresponding, or we can say that it is related to monetary cost. Money cost refers to any money expenditure which the firm or supplier, or producer undertakes in purchasing or hiring factor of production or factor services.

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Suppose that US and Canada both produce steel and automobiles. Both countries face constant marginal cost conditions
(i.e., straight line PPFs). US can produce a maximum of 1000 tons of steel or a maximum of 500 automobiles when it uses
all its inputs to produce one or the other good. Canada can produce a maximum of 2000 tons of steel or 400
automobiles. In autarky, US produces 500 tons of steel and 250 autos. Canada produces 1000 tons of steel and 200
autos.
a) Which country has a comparative advantage in production of autos?
b) What will be the production gains when these countries start trading?
c) Suppose the countries trade at the terms of trade given by 1 auto: 3 tons of steel. Also suppose that the US continues to
consumer 250 autos. How many autos will the US export and how many tons of steel would it receive?
d) Find the consumption gains from trade for both countries.

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