Question

please answer letters D, E and F

Question 1 The economy of Home has 1,000 workers. Each day, workers have the opportunity to produce snowboards or cake. The marginal product of labor for snowboards is 25 per day and the marginal product of labor for cake is 10 per day. Consider these the initial technological levels for Home. For each part, give specific numerical answers and label graphs (slopes and intercepts) wherever possible.

Answer 1

Answer (d): It is given that with 1000 workers, the marginal product of labor for snowboards in 25 per day and that the marginal product of cake is 10 per day. This means that with the same number of labors, the country ’Home’ can produce 25 additional units of snowboard in one day and 10 additional units of cakes in the one day. This implies that the country ‘Home’ has a comparative advantage in the creation/production of snowboards.

                               Now, in its initial level of foreign trade, the country ‘Home’ will therefore earn larger share of profit from the trade of snowboard because it has the comparative advantage in the production of snowboard, i.e.

            $1 being the price of one snowboard, the country will trade off snowboards worth (25 x $1) = $25 in one day.

Answer (e): Autarky is the state or condition of a society wherein the country maintains a self-sufficient level of production and consumption without depending on the foreign nations for anything. Therefore, in the case given here, since the country ‘Home’ produces 5000 cakes and 12,500 snowboards in the state of Autarky, this means that he country ‘Home’ consumes all of the 5000 cakes and 12,500 snowboards in this state.

                    Under free trade, the country’s production potential will not change and therefore, the country can continue to produce the same 5000 cakes and 12,500 snowboards, however, the country’s consumption may differ as under free trade the country ‘Home’ may now want to trade off some portion of the production to its trading partners.

Answer (f): The Home economy would definitely benefit from free trade as the country ‘Home’ would now be in a position to trade off some portion of the production to its trading partners. However, with the same level of production and the price of the cake at $2 , the country ‘Home’ would benefit much lesser in comparison to if the price of cake was $3. In both the scenario’s the answer that the country would benefit from free trade would not change.