Economics Homework Help

INSTRUCTIONS:

1. Answer ALL questions.

2. Read the instructions of each question carefully .

3. Please include all steps in your answers. If you used a calculator or Excel to find some numbers, make a note that those numbers came from a machine.

4. If you draw diagrams, please make sure they are clearly presented.

Question 1

Suppose there are only two countries in the world, Country A and Country B. They can each produce two products, Good X and Good Y . Labour is the only factor input in the production of both products. There are 100 workers in Country A and 250 workers in Country B.

Figure 1 Production possibility frontiers for two countries (in the attachment)

(a) Please find the opportunity costs for producing one unit of Good X and one unit of Good Y for both Countries A and B. Explain clearly in which good(s) do both Countries A and B have an absolute and comparative advantage in.

(b) Right now , both countries are now producing at point C (with half effort in producing Goods X and Y) and they do not trade with each other . Making use of your answer in part (a), explain how they should specialize their production to raise world output above their current level. By how much will world output of each good be increased through this specialization?

Question 2

Suppose there are two countries in the world, Home and Foreign, which trade freely. There are only two goods in this world. X-ray machines (Good X) requires capital and labour to produce, and yoghurt (Good Y) requires land and labour to produce. Currently , Home imports Good X and exports Good Y to Foreign. One day , producers in Home (but not in Foreign) innovates and finds an improvement in its technology for producing Good X. The Home X industry becomes more productive by 10% as a result. There is no change in the productivities of any other good in either country. What will this do to

(a) The world equilibrium relative price of X?

(b) The real wage of labour in Home’s X industry?

(c) The purchasing power of land rent in Foreign’s Y industry?

Make sure you explain your answers. If you use diagrams, please draw and label them clearly .