Worked by ; Abdyl Sadaj
Professor A. Sejdini
2. American and Japanese workers can each produce
4 cars a year. An American worker can produce 10 tons of grain a year, whereas a Japanese worker can produce 5 tons of grain a year. To keep things simple, assume that each country has 100 million workers.
a) For this situation, construct a table analogous to the table in Figure 1.
| Car produced per year by a worker | Tons of grain produced per year by a worker | Amount produced by 100 milion workers |
car | Tons of grain |
USA | 4 | 10 | 400 milon | 1 miliard |
JAPAN | 4 | 5 | 400 milion | 500 milion |
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Conversely, JAPAN has a lower opportunity cost of producing cars than USA: A car costs JAPAN 5/4 tons of grain, but it costs USA 5/2 tons of grain. Thus, USA has a comparative advantage in growing grain, and JAPAN has a comparative advantage in producing cars.
f) Without trade, half of each country’s workers produce cars and half produce grain. What quantities of cars and grain does each country produce?
| Cars produced by half of workers | Tons of grain produced by half of workers |
USA | 200 million cars | 500 million |
JAPAN | 200 million cars | 250 million |
g) Starting from a position without trade, give an example in which trade makes each country better off.
4. Suppose that there are 10 million workers in Canada and that each of these workers can produce either 2 cars or 30 bushels of wheat in a year.
a) What is the opportunity cost of producing a car in Canada? What is the opportunity cost of producing a bushel of wheat in Canada? Explain the relation ship between the opportunity costs of the two goods.
| Opportunity Cost of: |
| 1 car | 1 bushel of wheat |
canada | 15 bushel of wheat | 1/15 cars |
a) Draw Canada’s production possibilities frontier. If Canada chooses to consume 10 million cars, how much wheat can it consume without trade? Label this point on the production possibilities frontier.
| cars | bushel of wheat |
canada | 20 million | 300 million |
| 10 million | 150 million |
Production Possibilities Frontier
b) Now suppose that the United States offers to buy 10 million cars from Canada in exchange for 20 bushels of wheat per car. If Canada continues to consume 10 million cars, how much wheat does this deal allow Canada to consume? Label this point on your diagram. Should Canada accept the deal?
This means that Canada should produce 20 million cars and 0 bushes of wheat and give 10 million to USA. This means that from this trade Canada gets 20 bushels of grain for every car sold. So Canada takes 200 million bushels of grain for 10 million of cars. I think Canada should accept the deal because the the point is above the Production Possibilities Frontier
6. The following table describes the production possibilities of two cities in the country of Baseballia :
a. Without trade, what is the price of white socks (in terms of red socks) in Boston? What is the price in Chicago?