ANSWERS TO PROBLEM SET 2

Transcription

1 Econ11: Principles of Economics Chp 3-Q2) ANSWERS TO PROBLEM SET 2 Tanks 5 3 A B F C D Cars E b. If U.S. allocates all of its resources to the production of cars, it can produce million cars (point E on the PPF). If it allocates all of its resources to the tank production it can produce thousand tanks (point A on the PPF). c. Any point inside the PPF is an economically inefficient point of production since U.S. can increase the production of one good without reducing the production of the other good. An example to such a point is point F inside the PPF. U.S. can increase the production of both goods by moving from point F to point C. d. At point B, the country is producing 1 million cars and 55 thousand tanks. If it increases the production of cars by 1 more million, U.S. moves to production point C on its PPF and its tank production drops to 45 thousand tanks. Thus at point B, the opportunity cost of producing 1 more million cars is the 1 thousand tank production that is sacrificed. e. At point D, the country is producing 3 million cars and 3 thousand tanks. If it increases the production of cars by 1 more million, U.S. moves to production point E on its PPF and its tank production drops to. Thus at point D, the opportunity cost of producing 1 more million cars is the 3 thousand tank production that is sacrificed. f. As the economy produces more cars (i.e. moves from point A towards point E), the opportunity cost of producing cars is increasing: At point A opportunity cost of producing 1 more million cars is 5 thousand tanks. At point B opportunity cost of producing 1 more million cars is 1 thousand tanks. At point C opportunity cost of producing 1 more million cars is 15 thousand tanks. At point D opportunity cost of producing 1 more million cars is 3 thousand tanks.

2 Thus, we have an increasing opportunity cost PPF. The reason for this increasing opportunity costs is that not all factors of production ( i.e. inputs) are equally productive in the production of both goods. As the economy produces more cars, it shifts its resources from tank production and puts them into car production. The first resources that are taken away from tank production are the ones that are less suitable for tank production. Thus the drop in tank production is less. As the economy continues to produce more cars, it takes away from tank production the resources that are most productive at tank production. Thus the drop in tank production increases. g. The change in technology is represented by a shift in the economy s PPF. But notice that the technology enables the economy to produce more tanks with the same resources and does not affect the car production. Tanks Cars

3 3. (a) (b) Since PPF between radios and calculators is assumed to be of constant opportunity cost each country s PPF is going to be a linear line. From the data provided we draw the PPF of the each country. (c) If each country operated at the midpoint of their PPF: US would consume: Japan would consume: 3 os and rs 8 os and rs US+Japan would have a total of 11 os and 1 calculators. (d) To find which good each country will specialize at, first we need to find the opportunity cost of producing each good for both countries. If we look at US s PPF, we see that the OC of producing 1 rs is production of os forgone. Then OC of producing 1 r is /1=.5 os forgone. For Japan, the OC of producing 8 rs is production of 1 os forgone. Then OC of producing 1 r is 1/8=2 os forgone. 1 US has the comparative advantage in calculator production and Japan has the comparative advantage in o production. Thus US should specialize in the production of calculators ( os, 1 rs) and Japan should specialize in the production of radios (1 os, rs). US+Japan s total production will be: (1 os, 1 rs) (e) The production point that we found in (d) (1 os, 1 rs) is one such point on US+Japan association s PPF. Next we can figure out the two extreme points on the association s PPF. If both countries produce calculators only than ( os, rs) will be on the joint PPF. Similarly if both countries produce radios only, than (2 os, rs) would be the other extreme point on the joint PPF. We mark all three points and then connect them by straight line segments. (f) US and Japan can share (1 os, 1 rs) as: US: 7 r, os Japan: 5 r, 1 os

4 US Japan US+Japan

5 4) Assume both countries have 1 million workers. CASE 1: NO TRADE Consider the no trade case where each country allocates half of its workers into industry and half of its workers to industry. (i) Since one worker in Japan can produce s or 14 s a day, a total of 5,=,, s and a total of 14 5,=7,, s will be produced and consumed in Japan. Since one worker in Taiwan can produce 3 s or 12 s a day, a total of 3 5,=15,, s and 12 5,=6,, s will be produced and consumed in Taiwan. PRODUCTION AND CONSUMPTION JAPAN,, 7,, TAIWAN 15,, 6,, CASE 2: SPECIALIZATION AND TRADE (ii) If Taiwan allocates all of its workers to production, 12,, s will be produced. If Japan allocates 1, workers to production and 9, workers to production: 1, 14=1,, s and 9, =36,, s will be produced in Japan. PRODUCTION JAPAN 36,, 1,, TAIWAN 12,, (iii) Suppose Japan and Taiwan make a trade agreement where Japan exports 15,37, s at an exchange rate of 1 per 2.65 s. Then, Japan would get 15,37,/2.65=5,8, s in return. So Japan could consume 5,8,+1,,=7,, s after trade. After exporting s, Japan would have 36,, 15,37,=,63, s left for its own consumption. Taiwan s consumption of s is 15,37, (i.e. the ones imported from Japan). Taiwan can consume the remaining s having exported 5,8, s to Japan: 12,, 5.8,=6,, s. CONSUMPTION JAPAN,63, 7,, TAIWAN 15,37, 6,, We see that both countries are better off as a result of trade in the sense that they can consume more of both goods compared to the situation where they did not trade.