1. Suppose the USA and Canada are considering whether to engage in trade. Here are the production possibilities of the two countries before trade occurs:

Table 1. Production of Apparel or Chemicals in the USA and Canada.

The Opportunity Costs of producing one product or the other are displayed.

1000s of Tons of

Apparel Units Chemicals

Nation Produced or Produced

USA 50 or 150

Canada 30 or 60

1. Which nation has the comparative advantage in producing Apparel? Which nation has the comparative advantage in producing chemicals? Explain how you arrived at these conclusions.
2. Explain the Law of Comparative Advantage, and its application to trading relationships between nations. In the example above, if the two nations decide to engage in mutually beneficial trade, which nation should specialize in producing Apparel and which nation should specialize in producing Chemicals, and why?
3. Suppose a trade proposal is made to exchange 1 thousand units of apparel for 2.5 tons of chemicals. Would these terms-of-trade (1 Apparel : 2.5 Chemicals ) be acceptable to, and mutually beneficial for, both the USA and Canada as trading partners? Why or why not?
4. What are the payoffs from open trade? What are some of the limitations associated with open trade

2. Suppose the USA and EU are trading, and currencies must be exchanged as goods/services are imported and exported between the two regions. The $USD is the currency of the USA, and the Euro is the currency of the EU.

Are the following statements correct or incorrect? Why or why not?

• If the USA is exporting its goods to the EU, these exports from the USA to the EU create a demand for Euros in the Currency Exchange Market for Euros.
• If the USA is importing goods from the EU, these imports to the USA from the EU create a supply of $USD in the Currency Exchange Market for $USDs.
• If the EU is importing goods from the USA, these imports to the EU from the USA create a demand for $USD in the Currency Exchange Market for $USDs.

3. The Tasty Tuna Fishing Company decided to abandon gill netting technology because of its adverse environmental side-effects. Tasty Tunas management decided to utilize a more traditional pole-and-line fishing method. They utilize a fishing vessel that can accommodate multiple fishermen per day. The managers were unsure of the optimal size of the crew who would man the vessel and catch the tuna. Tasty Tunas managers experimented with different size crews on the vessel. They generated the following short-run production relationship between the number of fishermen per vessel, and the daily catch of tuna (in total pounds):

# Fishermen per vessel

# Lbs. / Day Tuna Catch

Tasty Tunas Short-Run Production Function

0	0
1	50
2	110
3	300
4	450
5	590
6	665
7	700
8	725
9	710

Based on Tasty Tunas production function above, please answer the questions below.

1. Assume that Tasty Tuna currently has only one vessel, but can hire alternative numbers of fisherman to help with the catch. Completely explain why it is appropriate to view this scenario as short run production.
2. Using the concepts of the Law of Diminishing Returns and the three Stages of Production in the Short Run, discuss why the following levels of input and output are important:
   • The variable input labor level (L = # fishermen) where the Daily Tuna Marginal Catch per unit of Labor (DQ/DL) is at its maximum. What is this (DQ/DL) amount?
   • The variable input labor level (L = # fishermen) where the Daily Tuna Average Catch per unit of Labor (Q/L) is at its maximum. What is this (Q/L) amount?
   • The variable input labor level (L = # fishermen) where the Daily Total Tuna Catch (Q), is at its maximum. What is this Q amount?
   • The variable input labor level (L = # fishermen) where the Daily Tuna Marginal Catch per unit of Labor (DQ/DL) is negative. What is this (DQ/DL) amount?

3. The daily wage rate for a fisherman is $100/day this is the Marginal Factor Cost (DTC/DL). A multi-billionaire environmentalist, who was happy to see gill-netting go away, gave Tasty Tuna their vessel at no cost, causing Total Fixed Cost to be Zero. As a result, Total Cost (TC) simply equals Total Variable Cost (Daily Wage x #Fishermen). With these cost conditions identified, if the Market Price (P) of Tuna is $3.50 per pound, then what is the optimal number of fishermen to hire for maximum Total Profit? Does this maximum total profit occur within the boundaries of Stage 2 of short run production? Should it? Explain

4. What is the new optimal number of fishermen to hire for maximum Total Profit, under these two alternative Market Price (P) scenarios:

• The Market Price (P) of Tuna falls to $2.75 per pound
• The Market Price (P) of Tuna rises to $5.00 per pound
• Do these alternative levels of optimal hiring occur within Stage 2 of short run production? Should they? Explain.

5. If the demand for tuna caught via pole-and-line were to become popular, and Tasty Tuna would soon need to be catching a minimum of 1,000 pounds per day, why would this new scenario require a long run production function? Explain your reasoning. Why would the questions about the Expansion Path and returns-to-scale begin to become relevant? Explain your reasoning.