Submit
answers to the following questions in the unit drop box. You must
explain your answer and provide your supporting computations. Yes/No answers or
simple numbers are not acceptable and will not receive full credit.
Assume
there are two countries in the world, Highland (H) and lowland (L).
Both countries are initially self-sufficient in that they do not trade with
each other, a condition called “autarky.” Each country
produces wooden cabinets (W) and pounds of chocolate (C). Wages and
capital costs are the same in both industries.
1. In
country H, it takes 25 workers to produce 50 W’s per week but it takes 50
workers to produce 50 pounds of C per week.
1a.
All else held constant, for which good is labor productivity greater?
1b. Assuming
the same capital structures in both industries, which good will have
the lower average per unit cost to produce?
1c.
Using 50 workers per week to produce both goods,
how many W’s and how many pounds of C can country H produce each
week? Graph this using constant cost (straight line) production
possibility frontiers. (for each nation H and L, put one good (W or
C) on each of the two axis — the same respective way for each nation
— and draw a negatively sloped line between the maximum outputs for each good
on each axis. This will give you the straight line production
possibilities curves for each nation.) This might look like:
Nation
H: Put W on the vertical axis and C on the horizontal axis. Draw a
negatively sloped line between the maximum output of W and C.
Nation
L: Put W on the vertical axis and C on the horizontal axis. Draw
a negatively sloped line between the maximum output of W and C.
1d. If 100W = 50C, what is the opportunity cost of 1W in
terms of pounds of C?
1e.
What is the opportunity cost of 1C in terms of units of W?
1f.
Which good has the lowest opportunity cost to produce and is this the same good
that has the lowest average per unit cost in production?
2.
In country L, it takes 50 workers per week to produce 50 W’s, but only 25
workers per week to produce 50 pounds of C.
2a.
All else held constant, for which good is labor productivity greater?
2b.
Assuming the same capital structures in both industries, which good will have
the lower average per unit cost to produce?
2c.
Using 50 workers per week to produce both goods, how many W’s and how many
pounds of C can country L produce each week? Graph this using
constant cost (straight line) production possibility frontiers.
2d.
If 50W = 100C, what is the opportunity cost of 1W in terms of pounds of C?
2e.
What is the opportunity cost of 1C in terms of units of W?
2f.
Which good has the lowest opportunity cost to produce and is this the same good
that has the lowest average per unit cost in production?
3.
In autarky (a condition of isolation or self-sufficiency), country H produces
50 W’s and 25 pounds of C per week while country L produces 25 W’s and 50
pounds of C per week. Graph the autarky situation for each nation by
using constant cost (straight line) production possibility frontiers.
3a.
What is total world output per week of W and C?
3b.
If country H specializes completely in the good it producers relatively cheaper
(assume that the more efficient industry hires all the displaced
workers from the less efficient industry) and country L specializes
completely in the good it produces relatively cheaper (it also hires into the
more efficient industry all the displaced workers from the less efficient
industry), what then is total world output?
3c.
If both countries abandon autarky and country H and exports 50 W’s to
country L in exchange for 50 pounds of C from country L, how much will each
country’s level of consumption change? Graph this new level of
consumption relative to the autarky constant cost (straight line)
production possibility frontiers for each nation.
4.
If specialization and trade increase the supply of W’s and pounds of C in
both country’s H and L relative to the same number as workers/consumers
(i.e., demand stays the same), what will happen to the prices of W and C
in each country?
5.
What will it cost each nation to revert to autarky in order
to protect the jobs of those workers in each nation’s relatively less
efficient industry?