1、Chapter 21Home has 1200 units of labor available. It can produce two goods, apples and bananas. The unit labor requirement in apple production is 3, while in banana production it is 2.aGraph out the production possibilities frontier: bWhat is the opportunity cost of apples in terms of bananas?5.1Lba
2、cIn the absence of trade, what would the price of apples in terms of bananas be?In the absence of trade, since labor is the only factor of production and supply decisions are determined by the attempts of individuals to maximize their earnings in a competitive economy, only when will both goods be p
3、roduced. So Lbaba/P 1.5/Pb2Home is as described in problem 1. There is now also another country, Foreign, with a labor force of 800. Foreigns unit labor requirement in apple production is 5, while in banana production it is 1. aGraph Foreigns production possibilities frontier: bConstruct the world r
4、elative supply curve.Homes PPF0200400600800200 400 600 800 QappleQbananaForeigns PPF0200400600800100080 160 240 320 400 Q*appleQ*banana3Now suppose world relative demand takes the following form: Demand for apples/demand for bananas = price of bananas/price of apples.aGraph the relative demand curve
5、 along with the relative supply curve: ab/P/DWhen the market achieves its equilibrium, we have 1ba)(DbaPQRD is a hyperbola xy1bWhat is the equilibrium relative price of apples?The equilibrium relative price of apples is determined by the intersection of the RD and RS curves. RD: yx1RS: 5,.1,5.0().,y
6、x 2 2/bPaecDescribe the pattern of trade. babeaba P/In this two-country world, Home will specialize in the apple production, export apples and import bananas. Foreign will specialize in the banana production, export bananas and import apples. dShow that both Home and Foreign gain from trade.Internat
7、ional trade allows Home and Foreign to consume anywhere within the colored lines, which lie outside the countries production possibility frontiers. And the indirect method, specializing in producing only one production then trade with other country, is a more efficient method than direct production.
8、 In the absence of trade, Home could gain three bananas by foregoing two apples, and Foreign could gain by one foregoing five bananas. Trade allows each country to trade two bananas for one apple. Home could then gain four bananas by foregoing two apples while Foreign could gain one apple by foregoi
9、ng only two bananas. So both Home and Foreign gain from trade.4Suppose that instead of 1200 workers, Home had 2400. Find the equilibrium relative price. What can you say about the efficiency of world production and the division of the gains from trade between Home and Foreign in this case?RD: yx1RS:
10、 5,.1,(),0yx .32 .1/bPaeIn this case, Foreign will specialize in the banana production, export bananas and import apples. But Home will produce bananas and apples at the same time. And the opportunity cost of bananas in terms of apples for Home remains the same. So Home neither gains nor loses but F
11、oreign gains from trade.5Suppose that Home has 2400 workers, but they are only half as production in both industries as we have been assuming, Construct the world relative supply curve and determine the equilibrium relative price. How do the gains from trade compare with those in the case described
12、in problem 4?In this case, the labor is doubled while the productivity of labor is halved, so the effective labor remains the same. So the answer is similar to that in 3. And both Home and Foreign can gain from trade. But Foreign gains lesser compare with that in the case 4. 6 ”Korean workers earn o
13、nly $2.50 an hour; if we allow Korea to export as much as it likes to the United States, our workers will be forced down to the same level. You cant import a $5 shirt without importing the $2.50 wage that goes with it.” Discuss.In fact, relative wage rate is determined by comparative productivity an
14、d the relative demand for goods. Koreas low wage reflects the fact that Korea is less productive than the United States in most industries. Actually, trade with a less productive, low wage country can raise the welfare and standard of living of countries with high productivity, such as United States
15、. So this pauper labor argument is wrong.7Japanese labor productivity is roughly the same as that of the United States in the manufacturing sector (higher in some industries, lower in others), while the United States, is still considerably more productive in the service sector. But most services are
16、 non-traded. Some analysts have argued that this poses a problem for the United States, because our comparative advantage lies in things we cannot sell on world markets. What is wrong with this argument?The competitive advantage of any industry depends on both the relative productivities of the indu
17、stries and the relative wages across industries. So there are four aspects should be taken into account before we reach conclusion: both the industries and service sectors of Japan and U.S., not just the two service sectors. So this statement does not bade on the reasonable logic.8Anyone who has vis
18、ited Japan knows it is an incredibly expensive place; although Japanese workers earn about the same as their U.S. counterparts, the purchasing power of their incomes is about one-third less. Extend your discussing from question 7 to explain this observation. (Hint: Think about wages and the implied
19、prices of non-trade goods.)The relative higher purchasing power of U.S. is sustained and maintained by its considerably higher productivity in services. Because most of those services are non-traded, Japanese could not benefit from those lower service costs. And U.S. does not have to face a lower in
20、ternational price of services. So the purchasing power of Japanese is just one-third of their U.S. counterparts.9How does the fact that many goods are non-traded affect the extent of possible gains from trade?Actually the gains from trade depended on the proportion of non-traded goods. The gains wil
21、l increase as the proportion of non-traded goods decrease. 10We have focused on the case of trade involving only two countries. Suppose that there are many countries capable of producing two goods, and that each country has only one factor of production, labor. What could we say about the pattern of
22、 production and in this case? (Hint: Try constructing the world relative supply curve.)Any countries to the left of the intersection of the relative demand and relative supply curves export the good in which they have a comparative advantage relative to any country to the right of the intersection.
23、If the intersection occurs in a horizontal portion then the country with that price ratio produces both goods. Chapter 31. In 1986, the price of oil on world markets dropped sharply. Since the United States is an oil-importing country, this was widely regarded as good for the U.S. economy. Yet in Te
24、xas and Louisiana 1986 was a year of economic decline. Why?It can deduce that Texas and Louisiana are oil-producing states of United States. So when the price of oil on world markets declined, the real wage of this industry fell in terms of other goods. This might be the reason of economic decline i
25、n these two states in 1986.2。An economy can produce good 1 using labor and capital and good 2 using labor and land. The total supply of labor is 100 units. Given the supply of capital, the outputs of the two goods depends on labor input as follows:To analyze the economys production possibility front
26、ier, consider how the output mix changes as labor is shifted between the two sectors.a. Graph the production functions for good 1 and good 2. ),(),( 2211 LKQLKQProduction Function for Good 1025.1 38.148.6 57.566 73.680.7 87.4 93.910001020304050607080901000 10 20 30 40 50 60 70 80 90 100Labor Input f
27、or Good 1OutputProduction Function for Good 2039.852.5 61.869.3 75.8 81.586.7 91.4 95.510001020304050607080901000 10 20 30 40 50 60 70 80 90 100Labor Input for Good 2Outputb. Graph the production possibility frontier. Why is it curved?Q1Q2L1L2PPF),(22LKQ ),(11LKQ010The PPF is curved due to declining
28、 marginal product of labor in each good. The total labor supply is fixed. So as L1 rises, MPL1 falls; correspondingly, as L2 falls, MPL2 rises. So PP gets steeper as we move down it to the right.2. The marginal product of labor curves corresponding to the production functions in problem2 are as foll
29、ows:a. Suppose that the price of good 2 relative to that of good 1 is 2. Determine graphically the wage rate and the allocation of labor between the two sectors.With the assumption that labor is freely mobile between sectors, it will move from the low-wage sector to the high-wage sector until wages
30、are equalized. So in equilibrium, the wage rate is equal to the value of labors marginal product. 2/121 PPMLPThe abscissa of point of intersection illustrated above should be between (20, 30). Since we only have to find out the approximate answer, linear function could be employed.The labor allocati
31、on between the sectors is approximately L1=27 and L2=73. The wage rate is approximately 0.98.b. Using the graph drawn for problem 2, determine the output of each sector. Then confirm graphically that the slop of the production possibility frontier at that point equals the relative price.Q1Q2L1L2PPF)
32、,(22LKQ ),(11LKQ010 21slopeThe relative price is P2/P1=2 and we have got the approximate labor allocation, so we can employ the linear function again to calculate the approximate output of each sector: Q1=44 and Q2=90.c. Suppose that the relative price of good 2 falls to 1. Repeat (a) and (b).The re
33、lative decline in the price of good 2 caused labor to be reallocated: labor is drawn out of production of good 2 and enters production of good 1 ( 1=62, L2=38). This also leads to an output adjustment, that is, production of good 2 falls to 68 units and production of good 1 rises to 76 units. And th
34、e wage rate is approximately equal to 0.74.Q1Q2L1L2PPF),(22LKQ ),(11LKQ010 slope21d. Calculate the effects of the price change on the income of the specific factors in sectors 1 and 2.With the relative price change from P2/P1=2 to P2/P1=1, the price of good 2 has fallen by 50 percent, while the pric
35、e of good 1 has stayed the same. Wages have fallen too, but by less than the fall in P2 (wages fell approximately 25 percent). Thus, the real wage relative to P2 actually rises while real wage relative to P1 falls. Hence, to determine the welfare consequence for workers, the information about their
36、consumption shares of good 1 and good 2 is needed. 3. In the text we examined the impacts of increases in the supply of capital and land. But what if the mobile factor, labor, increases in supply?a Analyze the qualitative effects of an increase in the supply of labor in the specific factors model, h
37、olding the price of both goods constant.For an economy producing two goods, X an Y, with labor demands reflected by their marginal revenue product curves, there is an initial wage of w1 and an initial labor allocation of Lx=OxA and Ly=OyA. When the supply of labor increases, the right boundary of th
38、e diagram illustrated below pushed out to Oy. The demand for labor in sector Y is pulled rightward with the boundary. The new intersection of the labor demand curves shows that labor expands in both sectors, and therefore output of both X and Y also expand. The relative expansion of output is ambigu
39、ous. Wages paid to workers fall. W xPML yPML1w2yOyABb Graph the effect on the equilibrium for the numerical example in problems 2 and 3, given a relative price of 1, when the labor force expands from 100 to 140. With the law of diminishing returns, the new production possibility frontier is more concave and steeper (flatter) at the ends when total labor supply increases.L1 increase to 90 from 62 and L2 increases to 50 from 38. Wages decline from 0.74 to 0.60. This new allocation of labor leads to a new output mix of approximately Q1=85 and Q2=77.
