problem set 1
University of Hong Kong
1st semester 2014-15
ECON0301/ECON2252 Theory of International Trade
Problem Set 1
Due time: 5pm September 26, 2014 (Friday)
Answer all of the following questions. While I encourage you to discuss with your classmates, you have to write up your own script. Please hand it in to your TA (Miss Jiuqi Zhao) by the due time via her pageon box on the 9th ‡oor of K.K. Leung Building.
1. Suppose that Home and Foreign have the marginal product of labor shown below.
Home
Foreign
Baseball bats
1/6
1
tennis rackets
1/2
1/4
(a) What is the opportunity cost of rackets in terms of bats for the
Home country? for the Foreign country?
(b) In which good does Home have the comparative advantage? why?
(c) At world equilibrium with trade, what do you know about the relative price of tennis rackets?
(d) Assume that tennis rackets trade for bats on world markets at an equlilbrium price of PR =PB = 2. Why will each country specialize? at what good?
(e) Demonstrate there will be gains from trade reaped by the foreign country when it specializes in bat production.
2. Evaluate the following statements.
(a) Developed countries have nothing to gain by trading with developing countries.
(b) Developed countries get all the gains when the trade with developing countries because they can dictate their prices to this country. 1
(c) The United States can no longer compete in world markets because American wages are too high.
(d) Less than complete specialization in production leads to a lower level of welfare than compete specialization.
3. Suppose Home has the marginal product of labor as shown in Problem
1. Now assume that preferences of citizens in Home are chacteristized by the following utility function: U (B; R) = B 0:75 R0:25 . There are
600 units of labor.
(a) Find out the equilibrium production and consumption bundles when trade is forbidden.
(b) In general, what is the demand function for R and the demand function for B? (use I; PR and PB to denote income, price
1st semester 2014-15
ECON0301/ECON2252 Theory of International Trade
Problem Set 1
Due time: 5pm September 26, 2014 (Friday)
Answer all of the following questions. While I encourage you to discuss with your classmates, you have to write up your own script. Please hand it in to your TA (Miss Jiuqi Zhao) by the due time via her pageon box on the 9th ‡oor of K.K. Leung Building.
1. Suppose that Home and Foreign have the marginal product of labor shown below.
Home
Foreign
Baseball bats
1/6
1
tennis rackets
1/2
1/4
(a) What is the opportunity cost of rackets in terms of bats for the
Home country? for the Foreign country?
(b) In which good does Home have the comparative advantage? why?
(c) At world equilibrium with trade, what do you know about the relative price of tennis rackets?
(d) Assume that tennis rackets trade for bats on world markets at an equlilbrium price of PR =PB = 2. Why will each country specialize? at what good?
(e) Demonstrate there will be gains from trade reaped by the foreign country when it specializes in bat production.
2. Evaluate the following statements.
(a) Developed countries have nothing to gain by trading with developing countries.
(b) Developed countries get all the gains when the trade with developing countries because they can dictate their prices to this country. 1
(c) The United States can no longer compete in world markets because American wages are too high.
(d) Less than complete specialization in production leads to a lower level of welfare than compete specialization.
3. Suppose Home has the marginal product of labor as shown in Problem
1. Now assume that preferences of citizens in Home are chacteristized by the following utility function: U (B; R) = B 0:75 R0:25 . There are
600 units of labor.
(a) Find out the equilibrium production and consumption bundles when trade is forbidden.
(b) In general, what is the demand function for R and the demand function for B? (use I; PR and PB to denote income, price