Principles of Macroeconomics (11th Edition)
11th Edition
ISBN: 9780133023671
Author: Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher: PEARSON
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Question
Chapter 2, Problem 7P
Subpart (a):
To determine
Production Possibilities Frontier.
Subpart (b):
To determine
Inefficient production possibility frontier.
Subpart (c):
To determine
What point chooses on PPF.
Subpart (d):
To determine
How the production of society will divide.
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2
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5
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per day
5
9
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Suppose there are two countries, Home and Foreign, that produce two goods, fish (F) and edamame (E), using only labor. In the Home country 6 units of labor are required to produce each unit of fish and the same for each unit of edamame. In the Foreign country, 2 units of labor is required to produce each fish and 3 units of labor are required for each unit of edamame. Each country has a labor force of 30 units available for production.
Suppose further that consumers in both countries have identical Leontief preferences, utility function U(CF, CE) = min(CF, CE), meaning that they want to consume the two goods in a fixed proportion of one-to-one, i.e. CF = CE (there is no substitution between the goods).
Suppose now that the labor force of the Home country is 6 times as big (i.e. 180 units, instead of 30).
How does this increase in labor force at Home change the pattern of trade?
Will the gains from trade for the Home country be higher or lower now? What happens to the welfare of the…
Efficiency requires that no more trades can be made between people, or equivalently, that their marginal rates of substitution (MRS) be equal for all goods they consume. Yet you and I never trade anything between each other, so how and when can we be sure we have equal MRS's?
Chapter 2 Solutions
Principles of Macroeconomics (11th Edition)
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