Ecn 3000 Homework

Harris ECN 3000 Homework #1b. Use the following information to answer questions 1-13 below. Two countries, Athens and Troy, produce two goods, ships and food, according to the following production functions: 1 ship = 4 capital + 2 labor 1 food = 1 capital + 3 labor. Athens has 200 units of capital and 100 units of labor available to produce ships and food. Troy has 100 units of capital and 150 units of labor available to produce ships and food. 1. Which good is capital intensive in production? Ship 2. Which good is labor intensive in production? Food 3.In which country is capital relatively abundant? Athens 4. In which country is labor relatively abundant? Tory 5. Based on your answers to 1 – 4 and using the Heckscher-Ohlin hypothesis, which country should specialize in the production of which good? Why? According to Heckscher-Ohlin hypothesis, countries will export products that utilize their abundant and cheap factors of production and import products that utilize the countr ies' scarce factors. As I said before, Athens is capital relatively abundant, Tory is labor relatively abundant. When a thing is abundant, it becomes cheap.Thus, Athens should specialize in the production of ship, and Troy should specialize in the production of food. 6. Calculate the limits of production for Athens and Troy. The limits of production for Athens: 200/4=50 ships or 100/3=33 foods. The limits of production for Troy: 100/4=25 ships or 150/3=50 foods. 7. Calculate the domestic terms of trade for Athens and Troy in terms of 1 ship. . 8. Based on your answer to question 7, which country should specialize in the production of which good? Why? Athens’ MRT=0. 66 and Troy’s MRT=2. So we can know Athens has comparative advantage in ship, and Troy has comparative advantage in food.Thus, Athens should specialize in the production of ship, and Troy should specialize in the production of food. 9. Draw the production possibilities curves for each country based on your a nswers to questions 6 and 7. Athens 42 33 PPC CPC 0 25 50 Ships Tory 50 25 CPC PPC 0 25 38 50 Ships 10. Supposing that Athens and Troy agree to trade ships and food at an international terms of trade of 1, what observation can you make about their relative demands for ships and food?Which country experiences the greater gains from trade? 1 ship is exchanged 1 food on condition that they agree to trade ships and food at an international term of trade of 1. Athens should trade 12. 5 ships to Troy, and Troy should trade 8. 5 foods to Athens. Troy will experience the greater gains from trade. 11. Draw the consumption possibilities curve for each country on the same graph you drew for question 9. 12. Suppose Athens wants to consume only 25 ships. How many food will it be able to consume? How many ships and how many food would Troy be able to consume?If Athens wants to consume only 25 ships, 58 foods will it be able to consume. 50 ships, 25 foods should Troy be able to consume. 13. Now, a ssume that only Athens discovers a new technology that allows it to produce ships using 1. 5 capital and 1 labor. What would be the effect on the pattern of trade between the two countries? Explain. Based on your assumption, Athens will decrease the cost of the ships. Then, the limits of production for Athens: 100/1=100 ships or 100/3=33 foods. Athens maybe experiences the greater gains from trade.However, the demand of Troy cannot be ignored. Troy may not consume that many ships. 14. Suppose that instead of trading goods, Athens and Troy decide to trade 50 units of Athens capital for 25 units of Troy’s labor. How would the countries’ relative welfare be affected? If this supposition were true, after Athens and Troy trade capital and labor, they will have same number of capital and labor. Then, the trades between these two countries are unnecessary. They can produce their own goods. ———————– Foods Foods