Ecn 3000 Homework

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Harris ECN 3000 Homework #1b.

Use the following information to answer questions 1-13 below. Two countries, Athens and Troy, produce two goods, ships and food, according to the following production functions:

1 ship = 4 capital + 2 labor
1 food = 1 capital + 3 labor.

Athens has 200 units of capital and 100 units of labor available to produce ships and food. Troy has 100 units of capital and 150 units of labor available to produce ships and food.

1. Which good is capital intensive in production?

Ship

2. Which good is labor intensive in production?

Food

3. In which country is capital relatively abundant?

Athens

4. In which country is labor relatively abundant?

Tory

5. Based on your answers to 1 – 4 and using the Heckscher-Ohlin hypothesis, which country should specialize in the production of which good? Why?

According to Heckscher-Ohlin hypothesis, countries will export products that utilize their abundant and cheap factors of production and import products that utilize the countries' scarce factors. As I said before, Athens is capital relatively abundant, Tory is labor relatively abundant. When a thing is abundant, it becomes cheap. Thus, Athens should specialize in the production of ship, and Troy should specialize in the production of food.

6. Calculate the limits of production for Athens and Troy.

The limits of production for Athens: 200/4=50 ships or 100/3=33 foods. The limits of production for Troy: 100/4=25 ships or 150/3=50 foods.

7. Calculate the domestic terms of trade for Athens and Troy in terms of 1 ship. .

8. Based on your answer to question 7, which country should specialize in the production of which good? Why?

Athens’ MRT=0.66 and Troy’s MRT=2. So we can know Athens has comparative advantage in ship, and Troy has comparative advantage in food. Thus, Athens should specialize in the production of ship, and Troy should specialize in the production of food....
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