Please answer each of the exercises below. While you may work together on the homework, you must turn in your own work (in your own words). Homework must be handed in at the beginning of class on the due date unless other arrangements have been made. No late homework will be accepted. Homework will not be accepted via e-mail.
NOTE: To receive full credit on problems, show all calculations necessary to answer the question. When graphing is required, you must fully label the graph (axes, intersections, slopes of line, etc.).
CHAPTER 3:
1. Suppose the United States has 32,000 labor hours which they can use to produce either cars or pharmaceuticals. Eight labor hours are required to produce one car, while only 2 hours are required to produce one bottle of a pharmaceutical.
a.) Draw the production possibility frontier for the United States.
b.) Suppose the relative price of a car is 6. Draw the United States' consumption possibility frontier. What good does the U.S. export? What good does it import?
c.) After trade, the United States consumes 2,500 cars. How many pharmaceuticals does the United States consume? Draw the trade triangle.
2. Discuss the key insights we can take from the classical/Ricardian model. What are some shortcomings of the model? More complete answers will receive higher scores on this question.
CHAPTER 4:
3. The Factor Price Equalization theorem is a seemingly startling outcome of the Heckscher-Ohlin model. Discuss the implications of this theorem including why this result does or does not hold in the "real world."
4. Consider the following table of factor endowments:
Countries
Factor Endowments U.S. Canada
Labor force (in millions of workers) 100 25
Capital stock (in thousands of machines) 30 15
a.) Which country is relatively abundant in capital?
b.) Which country is relatively abundant in labor?
c.) Suppose that Zambonis are labor intensive and field goal posts are capital intensive. Which country will have comparative advantage in, and thus export, field goal posts? Explain.
5. Chapter 4, Exercise 5 from either the 8th or 9th edition.
CHAPTER 6
6. True or False: Trade with tariffs is better than no trade. Prove/justify your answer.
7. Given the following information, calculate the cost to consumer, the benefit to producers, the change in government revenue, and the deadweight loss of a proposed 15% tariff on cars.
Price of cars (free trade): $40,000
Domestic Production (free trade): 200
Domestic Production (after tariff): 260
Domestic Consumption (free trade): 400
Domestic Consumption (after tariff): 360
CHAPTER 7
8. What quota quantity would result in the same domestic price as the "after-tariff price" from exercise seven above? Justify your answer.
9. Discuss the similarities and differences of tariffs and quotas.