Question

Answer questions 3 through 6 based on the following information: There are two countries, Home and Foreign, in a hypothetical world. Each of these two countries are Ricardian economies. Each country is endowed with 100 labor hours. Each country can use labor to produce two goods, cheese and car. The following table shows labor requirements per unit of each good in each country. Perfect competition prevails everywhere in the two-country world. Suppose that w and w*represent Home's and Foreign's hourly wage rates, respectively. Product Cheese (X) | Car (Y) Foreign a*x = 0.5 Table 1: Labor hours per unit of outputs Home aLX = 2 LY 9. Which of the following statements is correct? A) Home is more technologically advanced than Foreign in each industry B) Home is more technologically advanced than Foreign in the car industry. C) Foreign commands absolute advantage over Home in each industry. D) Foreign commands absolute advantage over Home only in the car industry 10. Which of the following statements is correct? A) Foreign is more cost effective than Home in producing both cheese and car. B) Home is more cost effective than Foreign in producing both cheese and car. C) Home is more comparatively advantaged than Foreign in producing cheese. D) Home has no comparative advantage over Foreign in each industry

Answer 1

Home:
Total cheese produced = Total endowment of labor/aLX = 100/2 = 50
Total cars produced = Total endowment of labor/aLY = 100/2 = 50

Foreign:
Total cheese produced = Total endowment of labor/aLX* = 100/1 = 100
Total cars produced = Total endowment of labor/aLY* = 100/0.5 = 200

9. C) Foreign commands absolute advantage over Home in each industry.
(As Foreign can produce more of both cheese and cars as compared to Home)

10. C) Home is more comparatively advantaged than Foreign in producing cheese.
(Opportunity cost of producing cheese in Home = Total cars produced in Home/Total cheese produced in Home = 50/50 = 1 car
Opportunity cost of producing cheese in Foreign = Total cars produced in Foreign/Total cheese produced in Foreign = 200/100 = 2 cars
So, Opportunity cost of producing cheese in Home < Opportunity cost of producing cheese in Foreign. Thus, Home has a comparative advantage in Cheese.)