ECO 4704 HW
1
1. The table
below describes the number of cars and TVs a worker can produce (MPL) in the US
and Mexico. The US and Mexico both have
40 workers.
Cars Televisions
U.S 2 2
Mexico 1 3
a. In the
space below, draw the Production Possibility Frontier for both countries. (1
point)
US Mexico
Cars Cars
b. What is
the relative price of cars in the US?
What is the relative price of cars in Mexico? (1 point)
c. Which
country has a comparative advantage in which good?(1 point)
d. Suppose
that without trade, the US consumes 60 cars and 20 TVs. Mexico consumes 90 TVs and 10 cars. Draw the indifference curves and show the
equilibrium on the graph above. (2 points)
e. Suppose
that the two countries trade with each other and the world price of cars
relative to televisions is 2. Draw and
label the consumption possibility frontier for each country on the graph above.
(1 point)
f. Calculate
the wages for workers in terms of TVs in each country if the relative world
price of cars is 2 TVs. Show your work. (2 points)
g. Do both
countries gain from trade? How do you
know? (2 points)