Question 16 0 out of 3 points The diagram below illustrates the PPFs for two countries that produce two goods. The two countries are free to trade with one another. A B PPF$_2$ D C PPF$_1$ x Which of the following production combinations are productive efficient? Selected Answer: Answers: Country 1 is at point C; country 2 is at point D. Country 1 is at point C; country 2 is at point D. Country 1 is at point A; country 2 is at point B. Country 1 is at point C; country 2 is at point A. All of the above are efficient.
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A PPF shows the maximum possible output combinations of two goods that can be produced with available resources and technology. Points on the PPF represent productive efficiency. Show more…
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Consider an economy that consists of two countries, A and B, that can produce two goods, indexed by 1 and 2. Labour is the only factor of production. The unit labour requirements in the production of goods 1 and 2 are given in the following table: | | Good 1 | Good 2 | |---|---|---| | Country A | 1 | 2 | | Country B | 8 | 40 | Yic denotes the production of good i in country c and Rc the revenue of country c. Preferences are assumed to be identical across countries. The demand for each good is given by: D1c = 2Rc * sqrt(p2c/p1c) and D2c = 2Rc * sqrt(p1c/p2c) where pic is the price of good i in country c. Country A has 1000 units of labour available, and country B has 16000 units of labour. In both countries, production occurs under conditions of perfect competition and labour can move across sectors at no cost. 1. Express the price of both goods in country A as a function of wage and unit labour requirements. 2. What is the relative price of good 1 in terms of good 2 in country A under autarky? 3. What is the equilibrium output of each good in country A? 4. Which country has an absolute advantage in the production of good 1? 5. Which country has a comparative advantage in the production of good 1? Good 2? 6. If the relative price of good 1 in terms of good 2 is 0.4, what is the world supply of each good? 7. Construct the world relative supply curve. 8. Graph the relative demand curve along with the relative supply curve. 9. Find the equilibrium world relative price under free trade. 10. Show graphically that both countries A and B gain from trade. 11. How much of each good does either country produce under free trade? How much of each good will they import/export? 12. Under free trade, what is the wage ratio between country A and country B?
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Consider a world with two countries and three goods. Both countries can use linear labor-only technologies to produce these goods. The labor productivities in the home country are denoted by zn,H, and in the foreign country by zn,F, where n ∈ {1, 2, 3}. These productivities are positive and satisfy z1,H / z1,F < z2,H / z2,F < z3,H / z3,F The home- and foreign-country labor supplies LH and LF are supplied inelastically, and consumers have identical preferences over the three consumption goods, described by the utility function u(c1, c2, c3) = ̢1 ln(c1) + ̢2 ln(c2) + ̢3 ln(c3), where ̢1 + ̢2 + ̢3 = 1. Write Cn,j for consumption of good n in country j, pn for the world price of good n, and wj for the wage in country j, where n ∈ {1, 2, 3} and j ∈ {H, F}. Assume that the equilibrium pattern of specialization is such that both countries produce strictly positive amounts of good 2. a. Determine the wage ratio wH/wF and the relative prices pn/wj for n ∈ {1, 2, 3} and j ∈ {H, F}. b. Given these wages and prices, determine Cn,j for n ∈ {1, 2, 3} and j ∈ {H, F}. c. Combine the results from a and b with market clearing conditions to determine the amounts of labor ln,j used to produce good n in country j, for n ∈ {1, 2, 3} and j ∈ {H, F}.
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