ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN: 9780190931919
Author: NEWNAN
Publisher: Oxford University Press
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For part E how do I tell what country will import and export?
Analyze the following two countries with linear (constant opportunity cost) production functions.
The production technology is given by the following unit labor requirements:
United States
Mexico (*)
Hats
1
4
Shoes
3
The total labor endowment in each country is 40 hrs.
(a) Graph the PPF's for the US and Mexico (put Shoes on the vertical axis).
(b) Which country has an absolute advantage in which good? Explain.
(c) Which country has a comparative advantage in which good? Explain.
(d) If the United States and Mexico engage in free trade with each other, the world relative price
of hats will lie between
and
Fill in the blanks and explain.
(e) Suppose that, after trade, the world relative price of shoes is 2 (i.e. Ps/Ph = 2). What is the
pattern of trade between the two countries (i.e., who exports which good?). Explain and use your
graph to answer whether the U.S. and Mexico gained or lost from trade.
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Transcribed Image Text:Analyze the following two countries with linear (constant opportunity cost) production functions. The production technology is given by the following unit labor requirements: United States Mexico (*) Hats 1 4 Shoes 3 The total labor endowment in each country is 40 hrs. (a) Graph the PPF's for the US and Mexico (put Shoes on the vertical axis). (b) Which country has an absolute advantage in which good? Explain. (c) Which country has a comparative advantage in which good? Explain. (d) If the United States and Mexico engage in free trade with each other, the world relative price of hats will lie between and Fill in the blanks and explain. (e) Suppose that, after trade, the world relative price of shoes is 2 (i.e. Ps/Ph = 2). What is the pattern of trade between the two countries (i.e., who exports which good?). Explain and use your graph to answer whether the U.S. and Mexico gained or lost from trade.
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