What is the range for the relative price of cloth such that the economy produces both cloth and food? Which good is produced if the relative price is outside this range?

ECON 3330

Assignment 4. On Krugman, Chapter 5 and 6,  & Rivoli Chapters 10, 11 &12.

Due (M) October 24  31 at the beginning of the class.

 

Name: __________________________________________

B #: _____________________

 

Question 1

Assume that Home has the following resource constraints”

K = 3,000; L =  2,000      (in units of capital and labor respectively)

a_KC = 1;  a_LC = 2; a_KF = 3; a_LF = 1  (in units of labor)

1. (1 point) What is the range for the relative price of cloth such that the economy produces both cloth and food? Which good is produced if the relative price is outside this range?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1. (2 points) Write down the unit cost of producing one yard of cloth and one calorie of food as a function of the price of one-machine-hour, r, and one work-hour, w. In a competitive market, these costs will be equal to the prices of cloth and food. Solve for the factor prices r and w.

 

 

 

 

 

 

 

 

 

 

1. (1 point) What happens to those factor prices when the price of cloth rises? Who gains and who loses from this change in the price of cloth? Why? Do these changes conform to the changes described for the case without substitution?

 

 

 

 

 

 

 

1. (2 points) Now assume that the economy’s supply of machine-hours increases from 3,000 to 4,000. Derive the new production possibility frontier (round your numbers).

 

 

 

 

 

 

 

 

 

 

1. (2 points) How much cloth and food will the economy produce after this increase in its capital supply, assuming that the economy is producing at a point such that all resources are being utilized?

 

 

 

 

 

 

 

1. (2 points) Describe how the allocation of machine-hours and work-hours between the cloth and food sectors changes (hint: Compare production of cloth and food before and after the increase in capital). Do these changes conform with the changes described for the case with factor substitution?

 

 

 

 

 

 

 

Question 2.

Japan primarily exports manufactured goods, while importing raw materials such as food and oil. Analyze the impact on Japan’s terms of trade of the following events:

1. (2 points) A war in the Middle East disrupts oil supply.

 

 

 

 

 

1. (2 points) Korea develops the ability to produce automobiles that it can sell in Canada and the United States.

 

 

 

 

 

1. (2 points) U.S. engineers develop a fusion reactor that replaces fossil fuel electricity plants.

 

 

 

 

 

1. (2 points) A harvest failure in Russia.

 

 

 

 

 

 

1. (2 points) A reduction in Japan’s tariffs on imported beef and citrus fruit.

 

 

 

 

 

 

 

 

 

Question 3.

2. (2.5 points) Why has the US textile and apparel industry retained extensive power in Washington? Why haven’t they these industries “faded away” like other now defunct US sectors such as television manufacturers?

 

 

 

 

 

 

 

2. (2.5 points) Discuss the contradiction between US Presidents’ free trade rhetoric and their willingness to offer trade protection to the US textile industry? Why do you think this pattern has been so repetitive?

 

 

 

 

 

 

 

2. (2.5 points) Many US Presidents have frequently employed protectionist rhetoric while campaigning. Why do you think such rhetoric is so effective and pervasive in US presidential politics? (note: and in other countries as well). Is it usually followed through by the candidates if they are elected? Why or why not?

 

 

 

 

 

 

 

 

 

 

 

2. (2.5 points) Do you think the jobs created in international trade and social and environmental issues normally help those who have lost their jobs in manufacturing facilities? Why or why not?