Answered: There are 2 countries, D and F. There…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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There are 2 countries, D and F. There are 2 products X and Y. Each country has only a single input labor hours, L_{i, j}, where i is D for Domestic or F for Foreign and j is either X for Good X use of the labor or Y for Good Y use of labor.

In country D:

X_D = a_D*L_{D, X}
Y_D = b_D*L_{D, Y}
L_D = L_{D, X} + L_{D, Y}

In country F:

X_F = a_F*L_{F, X}
Y_F = b_F*L_{F, Y}
L_F = L_{F, X} + L_{F, Y}

At the moment: a_D = 0.25, b_D = 0.5, L_D = 32, a_F = 0.8, b_F = 0.4, L_F = 40. Each country is operating in autarky and has determined to divide its labor force equal between the production of X and Y

Now the two countries open to trade. The Terms of Trade are set 1 unit of X for 1.5 units of Y. The countries exchange exactly 4 units of X. The countries partially specialize in their areas of comparative advantage.

How much labor must it move from producing Y to producing X to increase its production of X by 4 units?

∆L =

In the country that specializes in producing Y, how much additional Y must it produce?

∆Y =

In the country that specializes in producing Y, how labor must it move from producing X to producing Y?

∆L =

Definition Video Definition Ability of a country to produce goods and services at a lower opportunity cost compared to other countries. Here, opportunity cost refers to the forgone units of one good in order to produce one more unit of another good. For example, the opportunity cost of producing good X in country A is 2Y and in country B is 1.25Y. Country B has a lower opportunity cost of producing good X than country A. Therefore, country B has a comparative advantage in the production of good X. Video

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