PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
7th Edition
ISBN: 9781260110920
Author: Frank
Publisher: MCG
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Chapter 2, Problem 7P
(a)
To determine
Calculate the amount earned by Susan and Tom by selling all they produced on the basis of
(b)
To determine
The maximum amount of coffee and nuts that Susan and Tom can buy in the world market with their income and the combination of 40 pounds of coffee and 8 pounds of nuts is attainable or not.
(c)
To determine
The change in the
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Q2. Suppose that there are two countries (A and B) and two goods (a labor-intensive good X, textile, and a capital-intensive good Y, electronics). The two countries have identical demand for the two goods but different labor and capital endowments. Suppose (Px/Py)A < (Px/Py)B in autarky.
Identify the capital-abundant country and the labor-abundant country, respectively.
Use a PPF-indifference-curve graph to identify the autarky equilibrium for country B.
In the same graph, show country B's gains from trade when the two countries trade at a level of Px/Py that is between the two countries' autarky price ratios.
In the above graph, identify the trade triangle (including export and import quantities) for country B.
What would be the effect of trade on country B's relative nominal wage rate, i.e., the ratio of nominal wage rate relative to nominal capital rental rate (w/r)? Illustrate your answer graphically.
Your answer:
A country may specialize in the production of a good that it can produce at a lower opportunity cost than its trading partners. Because of this
comparative advantage, countries benefit when they specialize and trade with each other.
The following graphs show the production possibilities curves (PPCs) for Candonia and Lamponia. Both countries produce grain and coffee, each
initially (i.e., before specialization and trade) producing 12 million pounds of grain and 6 million pounds of coffee, as indicated by the grey stars
marked with the letter A.
32
28
B
COFFEE (Millions of pounds)
24
16
12
0
PPC
14
Candonia
A
8
24
12 16 20
GRAIN (Millions of pounds)
28
32
?
COFFEE (Millions of pounds)
32
28
24
20
16
12
4
0
10
PPC
4
Lamponia
A
4
11
8
12 16 20 24
GRAIN (Millions of pounds)
26
32
?
The production possibilities frontiers in the figure to the right show how many bananas and coconuts
you (Y) and your neighbor (N) can consume without trade. Suppose you are initially consuming 7
bananas and 3 coconuts and your neighbor is initially consuming 5 bananas and 5 coconuts.
Now, suppose you and your neighbor specialize by each only producing the good for which you have
a comparative advantage.
You give your neighbor half of your production for half of what he produces. (Enter all responses
as integers.)
If you trade with your neighbor, then you will have additional coconut(s) after the trade and
additional banana(s).
At the same time, your neighbor will be able to consume
as a result of trade
additional banana(s) and will be
Quantity of coconuts
28
26-
24-
22-
20-
4-
Your PPF
N
Neighbor's PPF
Y
4 6 8 10 12 14 16 18 20 22 24 26 28 30 32
Quantity of bananas
Q
G
Chapter 2 Solutions
PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
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- The production possibilities frontiers in the figure to the right show how many bananas and coconuts you (Y) and your neighbor (N) can consume without trade. Suppose you are initially consuming 6 bananas and 6 coconuts and your neighbor is initially consuming 5 bananas and 5 coconuts. Now, suppose you and your neighbor specialize by each only producing the good for which you have a comparative advantage. You give your neighbor half of your production for half of what he produces. (Enter all responses as integers.) If you trade with your neighbor, then you will have additional coconut(s) after the trade and banana(s). additional At the same time, your neighbor will be able to consume additional banana(s) and will be as a result of trade. Quantity of coconuts 287 26- 24- 22- 20- 18- 16- 14- 12- 10- 8- 6- 4- 2- 0- Your PPF 0 N Neighbor's PPI 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 Quantity of bananasarrow_forwardHelp please Level 2: Opportunity Cost, Comparative Advantage, and Specialization You have decided to specialize in gathering firewood while Friday has specialized in fishing. Your time allocation sliders are set to allocate all of your time to gathering firewood. Now, use the additional sliders to state how many logs you will trade to Friday and how many fish you want in return. You must select a trade that make both you and Friday better off than you were before specialization and trading. In other words, you must both receive more than 2000 calories of fish and 32 logs of firewood. Both you and Friday’s consumption point is displayed on the PPF graphs as you adjust the trade. There is a bar for me to slide over for fish and firewood for the number of hours (12 ohours total to be be used between both)arrow_forwardWhen a country has a comparative advantage in the production of a good, it means that it can produce this good at a lower opportunity cost than its trading partner. Then the country will specialize in the production of this good and trade it for other goods. The following graphs show the production possibilities frontiers (PPFS) for Yosemite and Congares. Both countries produce corn and lentils, each initially (ie, before specialization and trade) producing 6 million pounds of corn and 3 million pounds of lentils, as indicated by the grey stars marked with the letter A. LENTILS (MEns of pounds 0 0 194 2 Yout 4 10 CORN (Mof pounds) 14 16 LENTILS (Mons of pounds 0 2 Yosemite has a comparative advantage in the production of production of comparative advantage. After specialization, the two countries can produce a total of comm. Conger L 10 12 COHN (Mof pounds) 14 16 (?) conn while Congaree has a comparative advantage in the -Suppose that Yosemite and Congaree specialize in the production…arrow_forward
- With its given resources, Nicaragua can produce either 20 thousand pounds of chicken or 80 thousand pounds of quinoa per year. Costa Rica can produce either 100 thousand pounds of chicken or 200 thousand pounds of quinoa per year. Suppose the countries completely specialize and they decide to trade 14 thousand pounds of chicken for 42 thousand pounds of quinoa. After trade, Nicaragua will consume thousand pounds of chicken and thousand pounds of quinoa. After trade, Costa Rica will consume thousand pournds of chicken and thousand pounds of quinoa. Round to the nearest whole number.arrow_forwardA country may specialize in the production of a good that it can produce at a lower opportunity cost than its trading partners. Because of this comparative advantage, countries benefit when they specialize and trade with each other. The following graphs show the production possibilities curves (PPCs) for Freedonia and Sylvania. Both countries produce grain and tea, each initially (i.e., before specialization and trade) producing 24 million pounds of grain and 12 million pounds of tea, as indicated by the grey stars marked with the letter A. Freedonia has a comparative advantage in the production of , while Sylvania has a comparative advantage in the production of . Suppose that Freedonia and Sylvania specialize in the production of the goods in which each has a comparative advantage. After specialization, the two countries can produce a total of million pounds of tea and million pounds of grain. Suppose that Freedonia and Sylvania agree to trade. Each country focuses its…arrow_forwardWhen a country specializes in the production of a good, this means that it can produce this good at a lower opportunity cost than its trading partner. Because of this comparative advantage, both countries benefit when they specialize and trade with each other. The following graphs show the production possibilities frontiers (PPFS) for Freedonia and Sylvania. Both countries produce potatoes and tea, each initially (i.e., before specialization and trade) producing 12 million pounds of potatoes and 6 million pounds of tea, as indicated by the grey stars marked with the letter A. Freedonia Sylvania 32 32 28 28 24 PPF 24 20 20 16 16 12 12 PPF 8 8 4 4 4 8 12 16 20 24 28 32 4 8 12 16 20 24 28 32 POTATOES (Millions of pounds) POTATOES (Millions of pounds) Freedonia has a comparative advantage in the production of while Sylvania has a comparative advantage in the production of Suppose that Freedonia and Sylvania specialize in the production of the goods in which each has a comparative…arrow_forward
- The diagram below shows a natural monopoly. If the firm is unregulated, how much deadweight loss will there be? 2$ 100 76 60 56 48 АТС 36 MC 20 MR 288 360 Q 84 144 180 204arrow_forwardpart C and D needed only Consider the Production Possibility Frontiers of two countries, Australia and Brazil. Assume both have linear PPFs and the two countries both produce the same two goods: fruits and grain. Given its resources, Australia can produce either 2 units of grain per day or 1 unit of fruits; Brazil can produce either 5 units of grain or 4 units of fruits. (You may, for your own use, find it helpful to draw the Production Possibilities Frontiers for each country, though these won't be included in the answers you provide in you online responses.) a. If there were no trade, what would be the local price of fruits in each country, measured in units of grain? b. If trade is allowed, which country will export fruits and which country will export grain (if any)? c. What are the gains from trading a unit of fruit if the international price of fruit is equal to the average of the local prices in the two countries? d. How are the gains from trade distributed? Comment…arrow_forwardSuppose that in the country of England, two goods can be produced on available agricultural land: wine and wool. Suppose that the opportunity costs of production are constant, so that the PPF is a straight line. Further, when all resources are devoted to wine production, England can produce 200 (thousand) barrels. When all resources are devoted to wool production, England can produce 400 (thousand) bushels of wool. Suppose that a bushel of wool could be traded for a barrel of wine, one-for-one, on the international market. Draw a diagram illustrating the original situation, and this new situation, with wool on the X-axis and wine on the Y-axis.arrow_forward
- Q32 Consider the Production Possibility Frontiers of two countries, Australia and Brazil. Assume both have linear PPFs and the two countries both produce the same two goods: fruits and grain. Given its resources, Australia can produce either 2 units of grain per day or 1 unit of fruits; Brazil can produce either 5 units of grain or 4 units of fruits. (You may, for your own use, find it helpful to draw the Production Possibilities Frontiers for each country, though these won't be included in the answers you provide in you online responses.) a. If there were no trade, what would be the local price of fruits in each country, measured in units of grain? b. If trade is allowed, which country will export fruits and which country will export grain (if any)? c. What are the gains from trading a unit of fruit if the international price of fruit is equal to the average of the local prices in the two countries? d. How are the gains from trade distributed? Comment on why the benefits…arrow_forwardWhen a country specializes in the production of a good, this means that it can produce this good at a lower opportunity cost than its trading partner. Because of this comparative advantage, both countries benefit when they specialize and trade with each other. The following graphs show the production possibilities frontiers (PPFS) for Freedonia and Sylvania. Both countries produce lemons and sugar, each initially (i.e., before specialization and trade) producing 24 million pounds of lemons and 12 million pounds of sugar, as indicated by the grey stars marked with the letter A. SUGAR (Millions of pounds) 64 56 48 40 32 24 16 8 0 0 PPF 1 Freedonia 24, 12 8 16 24 32 40 48 LEMONS (Millions of pounds) 56 64 (?) SUGAR (Millions of pounds) 64 56 48 40 32 24 16 8 0 PPF 0 8 Sylvania A 16 24 32 40 48 56 64 LEMONS (Millions of pounds) (?) Freedonia has a comparative advantage in the production of while Sylvania has a comparative advantage in the production of . Suppose that Freedonia and Sylvania…arrow_forwardSpecialization and trade When a country has a comparative advantage in the production of a good, it means that it can produce this good at a lower opportunity cost than its trading partner. Then the country will specialize in the production of this good and trade it for other goods. The following graphs show the production possibilities frontiers (PPFs) for Shenandoah and Congaree. Both countries produce peas and lentils, each initially (i.e., before specialization and trade) producing 36 million pounds of peas and 18 million pounds of lentils, as indicated by the grey stars marked with the letter A. Shenandoah has a comparative advantage in the production of PEAS or LENTILS or NEITHER PEAS OR LENTILS or BOTH PEAS AND LENTILS. while Congaree has a comparative advantage in the production of PEAS or LENTILS or NEITHER PEAS OR LENTILS or BOTH PEAS AND LENTILS. Suppose that Shenandoah and Congaree specialize in the production of the goods in which each has a comparative…arrow_forward
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