Econ 355 Midterm Solutions

Transcription

1 Econ 355 Midterm Solutions Short Answer: Q1- a) Explain Rybczynski s theorem: If a factor of production (T or L) increases, then the supply of the good that uses this factor intensively increases and the supply of the other good decreases for any given commodity prices. b) Prove it using a diagram: i.e.) An Increase in the Supply of Land Labor used in food production Land used in cloth production T 1 C T C O C Labor used in cloth production L F F F 1 L C L 1 F 1 C L 1 C O F O 1 F T 1 F T F Land used in food production An increase in the supply of land leads to an increase in the production of food and a decrease in the production of cloth. This is because food is labor intensive and cloth is land intensive. Both land and labor are reallocated from the production of cloth to the production of food. c) What is the H-O theorem? A country will export that commodity which uses intensively its abundant factor and import that commodity which uses intensively its scarce factor. Q - Part A NBA supply and demand for players question: 1

2 a) Qd=00-4p; Qs=40p-40. Answer: p=10, Q=160. b) Qs=40p-0. Answer: p=5, Q=180. c) Change in consumer surplus = 850. Salary S 1 10 S = change in consumer surplus. 5 D Players Part B Use PPF from H-O model to show the effect on free trade between Canada and Mexico, given that Canada is richly endowed with skilled workers relative to Mexico. Canada is endowed in human capital skilled workers so it would export a good which uses skilled workers intensively (manufactures) and import the other good (food). Output of food, Q F Q a F A C Slope = -P M /P F B Slope = -P M /P F P A P B Q a C Q M Output of Manufactures

3 In this question we assume there are two resources: skilled workers and unskilled workers; manufacturing is skilled worker-intensive and food production is unskilled worker-intensive. (You could also have assumed land was the other resource). The above graph is for Canada. Pa is the closed economy price in Canada before trade. Point A is the pre-trade production and consumption point. After NAFTA the world price becomes Pb, production point becomes B, and consumption point becomes C. Since after trade Canadians can consume more than before, ie) is on a higher indifference curve, there are gains from liberalizing trade with Mexico. Q3 Widgets and cloth: opportunity cost and comparative advantage. Units Produced by One Worker/Hour Cloth Widgets Home 10 0 Foreign Recall: the opportunity cost of cloth in terms of widgets is the number of widgets that could be produced with the same resources as a given amount of cloth. With one worker/hour 30 widgets can be produced and 60 units of cloth can be produced (in Foreign); therefore opportunity cost of cloth in terms of widgets is 1/. You could also have found this answer by converting the table into one which describes how much labor is required to produce one unit of each good. i.e.: Unit labor requirements Cloth Widgets Home 1/10 1/0 Opp. Cost of cloth in terms of widgets: Foreign 1/60 1/30 a LC / a LW = (1/60)/(1/30) = 1/ Comparative Advantage - A country has a comparative advantage in producing a good if the opportunity cost of producing that good in terms of other goods is lower in that country than it is in other countries. Since opp. cost of cloth in terms of widgets in Home is (1/10)/(1/0) = > 1/, then Foreign must have a comparative advantage in cloth and Home must have a comparative advantage in widgets. Q4 Export subsidy in Thailand (small country). a) change in consumer welfare = -(a+b) b) Effect of export subsidy on Thailand s welfare = (a+b+c) (a+b) (b+c+d) = -(b+d); strictly welfare reducing. 3

4 c) It does not affect shrimp consumers in Canada because Thailand is a small country and cannot affect the world price of shrimp. d) Since China is a large country it can affect the world price; the effect of the export subsidy will be to lower the price faced by Canadian consumers of shrimp. This will benefit them since it will increase their consumer surplus. Price, S Subsidy P S P W a b c d = producer gain (a + b + c) = consumer loss (a + b) = cost of government subsidy (b + c + d ) D Export Quantity, Q5 Effect of increased labor immigrating to Canada, and which is of highly educated workers on Canadian wage rate. 4

5 Effect 1 Increase in labor force causes an expansion of the endowment of labor in Canada; P F MPL F shifts out. Effect Since the new laborers are more productive, both curves shift upwards P F MPL F Effect on wage Ambiguous 1 Wage rate, P M MPL M P M MPL M Wage rate, 1 P F MPL F 1 Labor used in manufactures, L 1 L L 3 Labor used in food, L F 5