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Chapter 3

Interdependence and the Gains from Trade

Educators


Problem 1

Maria can read 20 pages of economics in an hour. She can also read 50 pages of sociology in an hour. She spends 5 hours per day studying.
a. Draw Maria's production possibilities frontier for reading economics and sociology.
b. What is Maria's opportunity cost of reading 100 pages of sociology?

Heather D.
Numerade Educator

Problem 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.
b. Graph the production possibilities frontiers for the American and Japanese economies.
c. For the United States, what is the opportunity cost of a car? Of grain? For Japan, what is the
opportunity cost of a car? Of grain? Put this information in a table analogous to Table 1.
d. Which country has an absolute advantage in producing cars? In producing grain?
e. Which country has a comparative advantage in producing cars? In producing grain?
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?
g. Starting from a position without trade, give an example in which trade makes each country better off.

Yi Chun L.
Washington University in St Louis

Problem 3

Pat and Kris are roommates. They spend most of their time studying (of course), but they leave some time for their favorite activities: making pizza and brewing root beer. Pat takes 4 hours to brew a gallon of root beer and 2 hours to make a pizza. Kris takes 6 hours to brew a gallon of root beer and 4 hours to make a pizza.
a. What is each roommate's opportunity cost of making a pizza? Who has the absolute advantage
in making pizza? Who has the comparative advantage in making pizza?
b. If Pat and Kris trade foods with each other, who will trade away pizza in exchange for root beer?
c. The price of pizza can be expressed in terms of gallons of root beer. What is the highest price at which pizza can be traded that would make both roommates better off? What is the lowest price? Explain.

Kaylee M.
Numerade Educator

Problem 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 relationship between the opportunity costs of the two goods.
b. 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.
c. 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?

Yi Chun L.
Washington University in St Louis

Problem 5

England and Scotland both produce scones and sweaters. Suppose that an English worker can produce 50 scones per hour or 1 sweater per hour. Suppose that a Scottish worker can produce 40 scones per hour or 2 sweaters per hour.
a. Which country has the absolute advantage in the production of each good? Which country has the comparative advantage?
b. If England and Scotland decide to trade, which commodity will Scotland export to England Explain.
c. If a Scottish worker could produce only 1 sweater per hour, would Scotland still gain from trade?
Would England still gain from trade? Explain.

Kaylee M.
Numerade Educator

Problem 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?
b. Which city has an absolute advantage in the production of each color sock? Which city has a comparative advantage in the production of each color sock?
c. If the cities trade with each other, which color sock will each export?
d. What is the range of prices at which trade can occur?

Kaylee M.
Numerade Educator

Problem 7

A German worker takes 400 hours to produce a car and 2 hours to produce a case of wine. A French
worker takes 600 hours to produce a car and X hours to produce a case of wine.
a. For what values of X will gains from trade be possible? Explain.
b. For what values of X will Germany export cars and import wine? Explain.

Kaylee M.
Numerade Educator

Problem 8

Suppose that in a year an American worker can produce 100 shirts or 20 computers and a Chinese worker can produce 100 shirts or 10 computers.
a. For each country, graph the production possibilities frontier. Suppose that without trade the workers in each country spend half their time producing each good. Identify this point in your graphs.
b. If these countries were open to trade, which country would export shirts? Give a specific numerical example and show it on your graphs. Which country would benefit from trade? Explain.
c. Explain at what price of computers (in terms of shirts) the two countries might trade.
d. Suppose that China catches up with American productivity so that a Chinese worker can produce
100 shirts or 20 computers. What pattern of trade would you predict now? How does this advance
in Chinese productivity affect the economic wellbeing of the two countries' citizens?

Yi Chun L.
Washington University in St Louis

Problem 9

Are the following statements true or false? Explain in each case.
a. "Two countries can achieve gains from trade even if one of the countries has an absolute advantage in the production of all goods."
b. "Certain talented people have a comparative advantage in everything they do."
c. "If a certain trade is good for one person, it can"t be good for the other one."
d. "If a certain trade is good for one person, it is always good for the other one."
e. "If trade is good for a country, it must be good for everyone in the country."

Kaylee M.
Numerade Educator