1. K-land has 1,200 units of labor available. It can produce two goods, apples and bananas. The unit labor requirement in apple production is 3, while in banana production it is 2. C-vill has 800 units of labor available. C-vll's unit labor requirement in apple production is 5, while in banana production it is 1.
a. Graph K-land's PPF and C-vill's PPF (with quantity of apples on the x-axis).
b. What is K-land's opportunity cost for producing bananas and for producing apples? What is C-vill's?
c. What is the autarky price of apples (relative to bananas) in K-land and C-vill?
d. Construct the world relative supply curve for apples.
2. Now suppose world relative demand takes the following form: Relative price of apples = 1/ relative demand for apples (so if relative demand = 1/3 then relative price = 3).
a. Graph the relative demand curve along with the relative supply curve.
b. What is the equilibrium relative price of apples?
c. How many apples and how many bananas will each country produce at the equilibrium?
d. Show that both K-land and C-vill gain from trade by constructing the autarky and free trade consumption possibilities frontier for each country.
3. Suppose that instead of 1,200 workers, K-land has 2,400. Find the equilibrium relative price. What can you say about the efficiency of world production and the division of the gains from trade between K-land and C-vill in this case?
4. "Chinese workers earn only $.75 an hour; if we allow China to export as much as it likes, our workers will be forced down to the same level. You can't import a $10 shirt without importing the $.75 wage that goes with it." Discuss.
5. Japanese labor productivity is roughly the same as that of the United States in the manufacturing sector (higher in some industries, lower in others), while the United States is still considerably more productive in the service sector. But more services are non-traded.
a. Some analysts have argued that this poses a problem for the United States, because our comparative advantage lies in things we cannot sell on world markets. What is wrong with this argument?
b. Anyone who has visited Japan knows it is an incredibly expensive place; although Japanese workers earn about the same as their U.S. counterparts, the purchasing power of their incomes is about one-third less. Extend your discussion from part a to explain this observation.