Question

Consider the following Ricardian model.

MPL                           Labor Supply

Pens           Pencils

       France         1/10              1/15                     90

       Germany     1/12              1/20                     120

Answer the following questions and show your steps. For the T/F questions, please explain why they are T/F.

1. Draw the PPF for France. Label your picture, and calculate the slope of the PPF, (4 points)

2. France has the absolute advantage in both goods.

3. France has the comparative advantage in pens.

4. If the labor supply increases in France, France is more likely to have a comparative advantage in pencils since the production of pencils requires more labor.

5. In moving from closed-economy to free trade, France produces fewer pens.

6. Under free trade, the relative price of pens to pencils (P_pens^T/P_pencils^T) cannot exceed 2/3.

Answer 1

Ricardian model MPL Pens 1/10 1/12 Labor Supply France German Pencils 1/15 1/20 90 120 The PPF for France will be linear The marginal productivity of labor is 1/10 of producing pens, marginal productivity of labor is 1/15 of producing pencils and the labor supply is 90 Thus, France will produce pens 15 Pens Pencils The slope of France PPF 3/2 The marginal productivity of labor is 1/15 of producing pens, marginal productivity of labor is 1/20 of producing pencils and the labor supply is 120 120 120 12 Thus, Germany will produce 10pens| and。 20

Pens 10 Pencils The slope of Germany PPF 53 2) Yes, the marginal productivity of labor of France is greater than Germany for both goods. Thus, France has the absolute advantage in both goods 3) For comparative advantage calculate the opportunity cost Opportunity Pens 0.66 0.6 Pencils France Germany Since, the opportunity cost of producing Pens has lower in Germany. Thus, Germany has comparative advantage. Since, the opportunity cost of producing Pencils has lower in France. Thus, France has comparative advantage.

4) France already has comparative ad Thus, the given statement is false that if the labor supply increases in France, France is more likely to have a comparative advantage in pencils. Comparative advantage is independent of the vantage in producing Pencils. amount oflabor 5) In Free trade France will specialize in pencils, thus produces more pencil and fewer (or No) pens. Thus, the given statement is False. 6) Here, France will accept more than 2/3 price and Germany will not pay more than 5/3 Thus, the relative price will bees Hence, the given statement is False that relative price can't exceed 23