BUS 313, Spring 2016

Homework #2
1.

(Gerber Chapter 3, Question 1) Usetheinformationinthetableonlaborproductivitiesin

FranceandGermanytoanswerquestionsathroughf.

Cheese
Cars
a.

OutputperHourWorked
France
Germany
2kilograms
1kilogram
0.25
0.5

Whichcountryhasanabsoluteadvantageincheese?
Incars?
Francehasanabsoluteadvantageincheesebecauseitproducesmorecheeseperhourworked
thanGermany.Germanyhasanabsoluteadvantageincarsbecauseitproducesmorecarsthan
hoursworkedcomparedtoFrance.

b. WhatistherelativepriceofcheeseinFranceifitdoesnottrade?InGermany?
FranceTherelativepriceofcheeseinFranceis0.125carsperonekilogramofcheese.
GermanyTherelativepriceofcheeseinGermanyis0.5carsperonekilogramofcheese.
c.

WhatistheopportunitycostofcheeseinFrance?InGermany?
FranceTheopportunitycostsofcheeseinFranceis0.125carsperonerollofcheese.
GermanyTheopportunitycostsofcheeseinGermanyis0.5carsperonerollofcheese

d. Whichcountryhasacomparativeadvantageincheese?Incars?Explainyouranswer.
Francehasacomparativeadvantageincheesebecauseitsopportunitycostsarelowerthanthat
ofGermany.
e.

Whataretheupperandlowerboundsforthetradepriceofcheese?
.5kilograms(Cheese/Cars)>Pc w>.125kilograms(Cheese/Cars)

Prof. Jiakai Chen

BUS 313, Spring 2016

f.

DrawahypotheticalPPCforFranceandlabelitsslope.SupposethatFrancefollowsits
comparativeadvantageindecidingwheretoproduceonitsPPC.Labelitsproductionpoint.
Ifthetradepriceofcarsis5kilogramsofcheesepercar,drawatradeline(CPC)showinghow
Francecangainfromtrade.

Cheese

CP
C
PPC
2.

Cars

(Gerber Chapter 3, Question 2) SupposethetableinProblem1looksasfollows.Usethe

informationtoanswerquestionsathroughf.
OutputperHourWorked

Cheese

France

Germany

1kilogram

2kilograms

0.25car

2cars

Cars
a.

Whichcountryhasanabsoluteadvantageincheese?Incars?
Francehasanabsoluteadvantageincheese.Germanyhasanabsoluteadvantageincars.

b. WhatistherelativepriceofcheeseinFranceifitdoesnottrade?InGermany?
France(.25/1)TherelativepriceofcheeseinFranceis0.25carsperonekiloofcheese.
Germany(2/2)TherelativepriceofcheeseinGermanyis1carperonekiloofcheese.
c.

WhatistheopportunitycostofcheeseinFrance?InGermany?
FranceTheopportunitycostsinFranceare0.25carsperonekiloofcheese.
GermanyTheopportunitycostsinFranceare1carperonekiloofcheese.

d. Whichcountryhasacomparativeadvantageincheese?Incars?Explainyouranswer.
Francehasacomparativeadvantageincheesebecauseitsopportunitycostsofproducingcheese
arelowthanthatofGermany.
e.

Whataretheupperandlowerboundsforthetradepriceofcheese?

Prof. Jiakai Chen

BUS 313, Spring 2016

8(cheese/car)>Pcw>2(cheese/car)

f.

DrawahypotheticalPPCforFranceandlabelitsslope.SupposethatFrancefollowsits
comparativeadvantageindecidingwheretoproduceonitsPPC.Labelitsproductionpoint.
Ifthetradepriceofcarsis5kilogramsofcheesepercar,drawatradeline(CPC)showinghow
Francecangainfromtrade.

Cheese

CP
C
PPC

Cars

3. (Gerber Chapter 3, Question 5) Many people believe that the goal of international trade
should be to create jobs. Consequently, when they see workers laid off due to a firms
inability to compete against cheaper and better imports, they assume that trade must be
bad for the economy. Is this assumption correct? Why, or why not?
This is not a correct assumption. The purpose of trade is to give a more effective
distribution of resources. Also, even though some firms workers are being laid off the
market will develop another firm in its place that will be able to hire those workers.

Prof. Jiakai Chen