23 Sep Let’s assume there are only 2 countries that produce 2 good.? More specifically, suppose that the United States (US) and the United Kingdom (UK) each have 2 units of
Let’s assume there are only 2 countries that produce 2 good. More specifically, suppose that the United States (US) and the United Kingdom (UK) each have 2 units of productive resources, 1 used to produce Wine, the other Cloth. The US can produce 40 units of Wine with 1 unit of productive resources and 40 units of Cloth with 1 unit of productive resources. The UK can produce 20 units of Wine with 1 unit of productive resources and 10 units of cloth with 1 unit of productive resources. Using this information, please answer the questions below:
*Who has an absolute advantage in the production of Wine? Cloth?
*Who has a comparative advantage in the production of Wine? Cloth?
*Given specialization, what is production before trade? After trade?
*What are the gains from trade?
*What is the “range” of potential exchange rates between US and UK?
P2. Suppose that in Japan, without a tariff 10,000 cars will be sold per year at an equilibrium price of $20,000. With a $5,000 tariff, supply decreases such that 8,000 cars are produced at $22,500 per car.
*Use a supply and demand diagram to graphically illustrate the example above.
*Why is the increase in price less than the tariff?
*Who bears the burden of the tariff?
*What are government revenues from the tariff?
*What is the “dead-weight loss” associated with the tariff – i.e., the lost in Producer Surplus and Consumer Surplus?
P3. Finally, graphically explain the negative effects of quotas. How about subsidies? Label and explain results in detail.
P1. Let’s assume there are only 2 countries that produce 2 good. More specifically, suppose that the United States (US) and the United Kingdom (UK) each have 2 units of productive resources, 1 used to produce Wine, the other Cloth. The US can produce 40 units of Wine with 1 unit of productive resources and 40 units of Cloth with 1 unit of productive resources. The UK can produce 20 units of Wine with 1 unit of productive resources and 10 years of cloth with 1 unit of productive resources. Using this information, please answer the questions below:
First, organize data as:
|
Wine |
Cloth |
|
|
US |
40 |
40 |
|
UK |
20 |
10 |
*Who has an absolute advantage in the production of Wine? Cloth? US
*Who has a comparative advantage in the production of Wine? Cloth?
The relative price of W in US = 40C/40W = 1C/W
The relative price of C in US = 40W/40C = 1W/C
The relative price of W in UK = 10C/20W = 0.5C/W
The relative price of C in UK = 20W/10C = 2W/C
As you can see, the US should produce Cloth (it only costs US 1W/C), and UK Wine (it only costs UK 0.5C/W).
*Given specialization, what is production before trade? After trade?
Before trade:
|
Wine |
Cloth |
Total |
|
|
US |
40 |
40 |
80 |
|
UK |
20 |
10 |
30 |
|
60 |
50 |
110 |
After Trade:
|
Wine |
Cloth |
Total |
|
|
US |
0 |
80 |
80 |
|
UK |
40 |
0 |
40 |
|
40 |
80 |
120 |
*What are the gains from trade?
10 more units of output.
*What is the “range” of potential exchange rates between US and UK?
P2. Suppose that in Japan, without a tariff 10,000 cars will be sold per year at an equilibrium price of $20,000. With a $5,000 tariff, supply decreases such that 8,000 cars are produced at $22,500 per car.
*Use a supply and demand diagram to graphically illustrate the example above. Just let the S curve shift parallel to the left $5,000…
*Why is the increase in price less than the tariff?
B/c the burden of the tariff is shared by consumers and producers.
*Who bears the burden of the tariff?
Consumers and producers. Consumers pay more ($22,500) and producers receive less ($17,500).
*What are government revenues from the tariff?
These can be solved as $5,000*8,000=$40,000,000.
*What is the “dead-weight loss” associated with the tariff – i.e., the lost in Producer Surplus and Consumer Surplus?
This is (1/2)(2,000)($2,500)+(1/2)(2,000)($2,500)=5,000,000
P3. Finally, graphically explain the negative effects of quotas. How about subsidies? Label and explain results in detail.
You can find answers to this question in the book and/or online…
image1.png
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P1. Let’s assume there are only 2 countries that produce 2 good. More specifically, suppose that the United States (US) and the United Kingdom (UK) each have 2 units of productive resources, 1 used to produce Wine, the other Cloth. The US can produce 40 units of Wine with 1 unit of productive resources and 40 units of Cloth with 1 unit of productive resources. The UK can produce 20 units of Wine with 1 unit of productive resources and 10 years of cloth with 1 unit of productive resources. Using this information, please answer the questions below:
First, organize data as:
|
Wine |
Cloth |
|
|
US |
40 |
40 |
|
UK |
20 |
10 |
*Who has an absolute advantage in the production of Wine? Cloth? US
*Who has a comparative advantage in the production of Wine? Cloth?
The relative price of W in US = 40C/40W = 1C/W
The relative price of C in US = 40W/40C = 1W/C
The relative price of W in UK = 10C/20W = 0.5C/W
The relative price of C in UK = 20W/10C = 2W/C
As you can see, the US should produce Cloth (it only costs US 1W/C), and UK Wine (it only costs UK 0.5C/W).
*Given specialization, what is production before trade? After trade?
Before trade:
|
Wine |
Cloth |
Total |
|
|
US |
40 |
40 |
80 |
|
UK |
20 |
10 |
30 |
|
60 |
50 |
110 |
After Trade:
|
Wine |
Cloth |
Total |
|
|
US |
0 |
80 |
80 |
|
UK |
40 |
0 |
40 |
|
40 |
80 |
120 |
*What are the gains from trade?
10 more units of output.
*What is the “range” of potential exchange rates between US and UK?
P2. Suppose that in Japan, without a tariff 10,000 cars will be sold per year at an equilibrium price of $20,000. With a $5,000 tariff, supply decreases such that 8,000 cars are produced at $22,500 per car.
*Use a supply and demand diagram to graphically illustrate the example above. Just let the S curve shift parallel to the left $5,000…
*Why is the increase in price less than the tariff?
B/c the burden of the tariff is shared by consumers and producers.
*Who bears the burden of the tariff?
Consumers and producers. Consumers pay more ($22,500) and producers receive less ($17,500).
*What are government revenues from the tariff?
These can be solved as $5,000*8,000=$40,000,000.
*What is the “dead-weight loss” associated with the tariff – i.e., the lost in Producer Surplus and Consumer Surplus?
This is (1/2)(2,000)($2,500)+(1/2)(2,000)($2,500)=5,000,000
P3. Finally, graphically explain the negative effects of quotas. How about subsidies? Label and explain results in detail.
You can find answers to this question in the book and/or online…
image1.png
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