Question

Part A. These questions help you review the Introduction and the Ricardian model. 32 points (2 points each, except 1 and 11).

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.

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.

7. Going from closed-economy to free trade, pencil-producing workers in France achieve higher standards of living, but pen-producing workers do not.

8. Under free trade, the pen output of the entire world equals 10 units.

9. If Germany consumes 7 pens under free trade, then France consumes 3 pens.

10. If Germany consumes 7 pens under free trade, then France imports 3 pens.

12. Under free trade, the relative wage of France to Germany (w^FRANCE/w^GERMANY) equals 16/13.

13. Under free trade, the real wage for pencils in Germany equals 13/400.

14. Under free trade, the real wage for pencils in France equals 1/15.

Answer 1

Ricardian model MPL Pens 1/10 1/12 Labor Suppl Pencils 1/15 1/20 90 120 France German For comparative advantage calculate the opportunity cost Opportunitv Pens 0.66 0.6 Pencils France German 1.66 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 advantage in producing Pencils 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 amount of labor 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 be-ㄑㄧˇ-<- Hence, the given statement is False that relative price can't exceed 2/3 2 P Penril

7) In Free trade France will specialize in pencils, thus produces more pencil and fewer (or No) pens. Thus, pencil-producing workers in France achieve higher standards of living, but pen-producing workers do not. Hence, the given statement is True. 8) The opportunity cost of producing Pens has lower in Germany. Thus, Germany has comparative advantage in producing Pens. The marginal productivity of labor is 1/15 of producing pens, marginal productivity of labor is 0 of producing pencils and the labor supply is 120. Thus, Germany will produce 10pens Hence, the given statement is True that Under free trade, the pen output of the entire world 120 12 equals 10 units