Consider the production possibilities for the US and Canada in the tables below. The first table lists the factor endowments for both countries in terms of the amount of capital and labor available in the given country and the second table provides production capabilities for the two countries for cars and lumber.
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Table 1
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US
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Canada
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Capital
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10 machines
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40 machines
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Labor
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60 workers
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200 workers
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Table 2
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US
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Canada
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Cars per worker
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3
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5
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Lumber per worker
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600
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250
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Many products can be made in these two countries, but let's look specifically at the production of bread and steel.
- Suppose that the production requirement for one loaf of bread is one machine and 8 workers, while the production requirement for one unit of steel is two machines and 8 workers.
- Which good, bread or steel, is relatively capital intensive in production?
- Which good is relatively labor intensive?
- Show how you determined this.
- Which country will export bread? Steel? Why?
- Show how you determined this.
Now suppose that the 60 workers in the United States put all of their resources in to producing cars and lumber.
- What is the opportunity cost of producing lumber in the U.S.?
- What is the opportunity cost of producing cars in the U.S.?
- Now, draw the U.S.'s production possibilities frontier with lumber on the X-axis.
- If the United States chooses to produce 135 cars, how much lumber can it consume without trade? Label this point A on the production possibilities frontier.
- Now suppose that Canada offers to trade 50 cars for 200 units of lumber per car. If the U.S. continues to consume 135 cars, how much lumber does this deal allow the U.S. to consume?
- Should the United States accept the deal?
- Show all work and provide a complete analysis of your reasoning