15.9: Exercises for Chapter 15

EXERCISE 15.1

The following table shows the labour input requirements to produce a bushel of wheat and a litre of wine in two countries, Northland and Southland, on the assumption of constant cost production technology – meaning that the production possibility curves in each are straight lines. You can answer this question either by analyzing the table or developing a graph similar to Figure 15.1, assuming each economy has 4 units of labour.

Labour requirements per unit produced
	Northland	Southland
Per bushel of wheat	1	3
Per litre of wine	2	4

1. Which country has an absolute advantage in the production of both wheat and wine?

2. What is the opportunity cost of wheat in each economy? Of wine?

3. What is the pattern of comparative advantage here?

4. Suppose the country with a comparative advantage in wine reduces wheat production by one bushel and reallocates the labour involved to wine production. How much additional wine does it produce?

EXERCISE 15.2

Canada and the United States can produce two goods, xylophones and yogurt. Each good can be produced with labour alone. Canada requires 60 hours to produce a ton of yogurt and 6 hours to produce a xylophone. The United States requires 40 hours to produce the ton of yogurt and 5 hours to produce a xylophone.

1. Describe the state of absolute advantage between these economies in producing goods.

2. In which good does Canada have a comparative advantage? Does this mean the United States has a comparative advantage in the other good?

3. Draw the production possibility frontier for each economy to scale on a diagram, assuming that each economy has an endowment of 240 hours of labour, and that the PPFs are linear.

4. On the same diagram, draw Canada's consumption possibility frontier on the assumption that it can trade with the United States at the United States' rate of transformation.

5. Draw the US consumption possibility frontier under the assumption that it can trade at Canada's rate of transformation.

EXERCISE 15.3

The domestic demand for bicycles is given by P=36–0.3Q. The foreign supply is given by P=18 and domestic supply by P=16+0.4Q.

1. Illustrate the market equilibrium on a diagram, and illustrate the amounts supplied by domestic and foreign suppliers in equilibrium.

2. If the government now imposes a tariff of $6 per unit on the foreign good, illustrate the impact geometrically.

3. In the diagram, illustrate the area representing tariff revenue.

4. Optional: Compute the price and quantity in equilibrium with free trade, and again in the presence of the tariff.

EXERCISE 15.4

1. In Exercise 15.3, illustrate graphically the deadweight losses associated with the imposition of the tariff.

2. Illustrate on your diagram the additional amount of profit made by the domestic producer as a result of the tariff. [Hint: Refer to Figure 15.4 in the text.]

EXERCISE 15.5

The domestic demand for office printers is given by P=40–0.2Q. The supply of domestic producers is given by P=12+0.1Q, and international supply by P=20.

1. Illustrate this market geometrically.

2. If the government gives a production subsidy of $2 per unit to domestic suppliers in order to increase their competitiveness, illustrate the impact of this on the domestic supply curve.

3. Illustrate geometrically the cost to the government of this scheme.

EXERCISE 15.6

Consider the data underlying Figure 15.1. Suppose, from the initial state of comparative advantage, where Canada specializes in fish and the US in vegetable, we have a technological change in fishing. The US invents the multi-hook fishing line, and as a result can now produce 64 units of fish with the same amount of labour, rather than the 40 units it could produce before the technological change. This technology does not spread to Canada however.

1. Illustrate the new PPF for the US in addition to the PPF for Canada.

2. What is the new opportunity cost (number of fish) associated with one unit of V?

3. Has comparative advantage changed here – which economy should specialize in the production of each good?

EXERCISE 15.7

The following are hypothetical (straight line) production possibilities tables for Canada and the United States. For each line required, plot any two or more points on the line.

Canada					United States
	A	B	C	D		A	B	C	D
Peaches	0	5	10	15	Peaches	0	10	20	30
Apples	30	20	10	0	Apples	15	10	5	0

1. Plot Canada's production possibilities curve.

2. Plot the United States' production possibilities curve.

3. What is each country's cost ratio of producing peaches and apples?

4. Which economy should specialize in which product?

5. Plot the United States' trading possibilities curve (by plotting at least 2 points on the curve) if the actual terms of the trade are 1 apple for 1 peach.

6. Plot the Canada' trading possibilities curve (by plotting at least 2 points on the curve) if the actual terms of the trade are 1 apple for 1 peach.

7. Suppose that the optimum product mixes before specialization and trade were B in the United States and C in Canada. What are the gains from specialization and trade?

1. Note that we are considering the PPFs to be straight lines rather than concave shapes. The result we illustrate here carries over to that case also, but it is simpler to illustrate with the linear PPFs.

2. To illustrate the gains numerically, let Canada import 3V from the US in return for exporting 18F. Note that this is a trading rate of 1:6. Hence, Canada consumes 3V and 17F (Canada produced 35F and exported 18F, leaving it with 17F). It follows that the US consumes 5V, having exported 3V of the 8V it produced, and obtained in return 18F in imports. The new consumption bundles are illustrated in the figure: (17,3) for Canada and (18,5) for the US. These consumption bundles clearly represent an improvement over the autarky situation. For example, if Canada had wished to consume 3V pre-trade, it would only have been able to consume 14F, whereas with trade it can consume 17F.