Consider a country called Italy, which can produce two goods, apples and bananas (A and B)....
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Consider a country called Italy, which can produce two goods, apples and bananas (A and B). Italy has L1200 units of labour available, and it takes it 3 units of labour to produce an apple, and 2 units of labour to produce a banana. 1. Draw the Italian production possibility frontier. 2. What is the opportunity cost of apples in terms of bananas? 3. In the absence of trade, what would the price of apples in terms of bananas be, and why? Now, assume that Italy can trade with another country called France. Denote French variables with a star. France has L* = 800 units of labour available, and takes 5 units of labour to produce an apple, and 1 unit of labour to produce a banana. 4. Draw the French production possibility frontier. 5. Draw the world relative supply curve. Assume from now on that in both countries, consumers have Cobb-Douglas preferences with equal spending shares on both goods (such as the ones used in Problem Set 1, or in the Lecture Slides). Then, we know that in Italy, 1 PA CA PB CB= (1200), and in France, 1 PA CA PB CB = · (800w*). 2 6. Show that these demand functions imply that the world relative demand is given by the following function: PA PB QB QA Hint: Use the fact that markets must clear, so that QA = CA + C and QB = CB + CB. If you cannot show this, take the result as given as proceed to the next questions. 7. Draw the relative demand curve in the same graph as the relative supply curve. Are the two countries in a situation of perfect specialization? 8. What is the equilibrium relative price of apples? 9. How many apples and bananas do Italians produce in the trade equilibrium? 10. How many apples and bananas do Italians consume in the trade equilibrium? Therefore, how many apples and how many bananas do Italians export or import? 11. Show that Italy gains from trade. Is this also true for France? Consider a country called Italy, which can produce two goods, apples and bananas (A and B). Italy has L1200 units of labour available, and it takes it 3 units of labour to produce an apple, and 2 units of labour to produce a banana. 1. Draw the Italian production possibility frontier. 2. What is the opportunity cost of apples in terms of bananas? 3. In the absence of trade, what would the price of apples in terms of bananas be, and why? Now, assume that Italy can trade with another country called France. Denote French variables with a star. France has L* = 800 units of labour available, and takes 5 units of labour to produce an apple, and 1 unit of labour to produce a banana. 4. Draw the French production possibility frontier. 5. Draw the world relative supply curve. Assume from now on that in both countries, consumers have Cobb-Douglas preferences with equal spending shares on both goods (such as the ones used in Problem Set 1, or in the Lecture Slides). Then, we know that in Italy, 1 PA CA PB CB= (1200), and in France, 1 PA CA PB CB = · (800w*). 2 6. Show that these demand functions imply that the world relative demand is given by the following function: PA PB QB QA Hint: Use the fact that markets must clear, so that QA = CA + C and QB = CB + CB. If you cannot show this, take the result as given as proceed to the next questions. 7. Draw the relative demand curve in the same graph as the relative supply curve. Are the two countries in a situation of perfect specialization? 8. What is the equilibrium relative price of apples? 9. How many apples and bananas do Italians produce in the trade equilibrium? 10. How many apples and bananas do Italians consume in the trade equilibrium? Therefore, how many apples and how many bananas do Italians export or import? 11. Show that Italy gains from trade. Is this also true for France?
Expert Answer:
Answer rating: 100% (QA)
1 Italian Production Possibility Frontier PPF Italy has 1200 units of labor Apples take 3 units of labor per unit Bananas take 2 units of labor per unit Imagine a graph with apples on the Xaxis and ba... View the full answer
Related Book For
International Economics Theory and Policy
ISBN: 978-0273754206
9th Edition
Authors: Paul R. Krugman, Maurice Obstfeld, Marc J. Melitz
Posted Date:
Students also viewed these economics questions
-
New-Keynesian financial aspects is additionally connected with improvements in the Keyne Inside this bunch analysts will quite often impart to different financial experts the accentua models...
-
where can you search for apps by specilty or business process? Explain
-
Mary produces both hats and apple pies: If Mary uses all her resources to produce hats, she can produce 48 hats an hour. If she uses all her resources to produce apple pies, she can make 24 apple...
-
You have recently been hired as a consultant for a personal financial planning firm. One of your first projects is creating a retirement plan for a couple, Tom and Helena Keeley. They have just...
-
Write a description about your understanding of historiography. Answer the following Questions a. What makes something a "history"? b. What is the best way to investigate history? c. To what extent...
-
What are the greatest common divisors of these pairs of integers? a) 37 53 73, 211 35 59 b) 11 13 17, 29 37 55 73 c) 2331, 2317 d) 41 43 53, 41 43 53 e) 313 517, 212 721 f) 1111, 0
-
In January 2005, InTech pays $1,350,000 for a tract of land with two buildings. It plans to demolish Building A and build a new shop in its place. Building B will be a company office; it is appraised...
-
A process stream is heated using a shell and tube heat exchanger. The exit temperature is controlled by adjusting the steam control valve shown in figure. During an open-loop experimental test, the...
-
Presented below are descriptions of specific existing control activities. Determine whether each description is an example of: Proper Use of Documentation Prenumbering of Documents Authorization of...
-
Investments 66-69 true or false 70 multiple choice 71-76 true or false Please and thank you Will thumbs up !. 66. Riskier investments must offer a higher potential return to compensate for the added...
-
Search information about only ONE topic of the following 1- Investment in marketable securities and accounting treatment . 2- Intangible assets and it's accounting evaluation . 3- Goods on...
-
What are the key architectural differences between a microkernel and a monolithic kernel, and how do these differences impact system performance and flexibility ?
-
A factory has done an analysis of the maintenance department cost showing that there is a fixed element of Shs. 500,000 per month and a variable element related to machine hours amounting to Shs....
-
If demand for a good is price inelastic (i.e. more inelastic than the price elasticity of supply) and the government levies a new tax on that good, find group or groups will bear the burden of the...
-
With SQL Server providing error messages so we can troubleshoot where the issue is coming from. How can we save our scripts for future use? What options does SQL Server provide for us to retain the...
-
4. Problem 9-08 (WACC) WACC eBook Problem Walk-Through David Ortiz Motors has a target capital structure of 40% debt and 60% equity. The yield to maturity on the company's outstanding bonds is 11%,...
-
Keating & Partners is a law firm specializing in labour relations and employee-related work. It employs 25 professionals (5 partners and 20 managers) who work directly with its clients. The average...
-
In the late 1970s, Britain seemed to have struck it rich. Having developed its North Sea oil-producing fields in earlier years, Britain suddenly found its real income higher as a result of a dramatic...
-
Is it possible for a country to have a current account deficit at the same time it has a surplus in its balance of payments? Explain your answer, using hypothetical figures for the current and non...
-
Explain why temporary and permanent fiscal expansions do not have different effects under fixed exchange rates, as they do under floating exchange rates.
-
What is the popular saying on which the cash flow fade method is founded?
-
Should the buyers costs be separated from the target companys costs in the cost savings that come out of a merger of two companies?
-
What is the cost of capital equal to?
Study smarter with the SolutionInn App