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2. At the beginning of the chapter, there is a brief quotation from David Ricardo; here is a longer
version of what Ricardo wrote:
England may be so circumstanced, that to produce the cloth may require the labor of 100 men for
one year; and if she attempted to make the wine, it might require the labor of 120 men for the same
time. To produce the wine in Portugal might require only the labor of 80 men for one year, and to
produce the cloth in the same country might require the labor of 90 men for the same time. It would
therefore be advantageous for her to export wine in exchange for cloth. This exchange might even
take place, notwithstanding that the commodity imported by Portugal could be produced there with
less labor than in England.
Suppose that the amount of labor Ricardo describes can produce 1,000 yards of cloth or 1,000 bottles
of wine, in either country. Then answer the following:
a. What is England’s marginal product of labor in cloth and in wine, and what is Portugal’s marginal
product of labor in cloth and in wine? Which country has absolute advantage in cloth, and in wine,
and why?
b. Use the formula
= ! / ! to compute the no-trade relative price of wine in each country.
Which country has comparative advantage in wine, and why?
3 Suppose that the Home country is much larger than the Foreign country. For example, suppose we
double the number of workers at Home from 25 to 50. Then Home is willing to export up to 100
bushels of wheat at its no-trade price of ! / ! = 1/2 rather than 50 bushels of wheat as shown in
Figure 2-11. In the following, we draw a new version of Figure 2-11, with the larger Home country.
From this figure, what is the new world relative price of wheat (at point D)?
Using this new world equilibrium price, draw a new version of the trade equilibrium in
Home and in Foreign, and show the production point and consumption point in each country.
Are there gains from trade in both countries? Explain why or why not.
4. Starting from equilibrium in the specific-factors model, suppose the price of manufactured goods
falls so that wages fall from W ′ to W in Figure 3-5 (in slides).
a. Show that the percentage falls in the wage is less than the percentage falls in the price of
manufacturing so that the real wage of labor in terms of manufactured goods goes up.
b. What happens to the real wage of labor in terms of agriculture?
c. Are workers better off, worse off, or are the outcome ambiguous?
5. Use the information given here to answer the following questions:
Sales revenue = PM • _QM = 150
Payments to labor = W • _LM = 100
Payments to capital = RK • _K = 50
Sales revenue = PA • _QA = 150
Payments to labor = W • _LA = 50
Payments to land = RT • _T = 100
Holding the price of manufacturing constant, suppose the increase in the price of agriculture is 10%
and the increase in the wage is 5%.
a. Determine the impact of the increase in the price of agriculture on the rental on land and the rental
on capital.
b. Explain what has happened to the real rental on land and the real rental on capital.
6. Home produces two goods, computers and wheat, for which capital is specific to computers, land is
specific to wheat, and labor is mobile between the two industries. Home has 100 workers and 100
units of capital but only 10 units of land.
a. Draw a graph similar to Figure 3-1 (in slides) with the output of wheat on the vertical axis and the
labor in wheat on the horizontal axis. What is the relationship between the output of wheat and the
marginal product of labor in the wheat industry as more labor is used?
b. Draw the production possibilities frontier for Home with wheat on the horizontal axis and
computers on the vertical axis.
c. Explain how the price of wheat relative to computers is determined in the absence of trade.
d. Reproduce Figure 3-4 with the amount of labor used in wheat measuring from left to right along
the horizontal axis and the amount of labor used in computers moving in the reverse direction.
e. Assume that due to international trade, the price of wheat rises. Analyze the effect of the increase
in the price of wheat on the allocation of labor between the two sectors.
7. Suppose there are drastic technological improvements in shoe production at Home such that shoe
factories can operate almost completely with computer-aided machines. Consider the following data
for the Home country:
Sales revenue = ! ∗ ! = 100
Payments to labor = W∗ ! = 50
Payments to capital = R∗ ! = 50
Percentage increase in the price = ∆ ! / ! = 0%
Sales revenue = ! ∗ ! = 100
Payments to labor = W∗ ! = 5
Payments to capital = R∗ ! = 95
Percentage increase in the price = ∆ ! / ! = 50%
a. Which industry is capital-intensive? Is this a reasonable question, given that some industries are
capital-intensive in some countries and labor-intensive in others?
b. Given the percentage changes in output prices in the data provided, calculate the percentage
change in the rental on capital.
c. How does the magnitude of this change compare with that of labor?
d. Which factor gains in real terms, and which factor loses? Are these results consistent with the
Stolper-Samuelson theorem?
8. A housekeeper from the Philippines is contemplating immigrating to Singapore in search of higher
wages. Suppose the housekeeper earns approximately $2,000 annually and expects to find a job in
Singapore worth approximately $5,000 annually for a period of three years. Furthermore, assume
that the cost of living in Singapore is $500 more per year than at home.
a. What can we say about the productivity of housekeepers in Singapore versus the Philippines?
b. What is the total gain to the housekeeper from migrating?
c. Is there a corresponding gain for the employer in Singapore? Explain.
9. Starting from the long-run trade equilibrium in the monopolistic competition model, as illustrated
in Figure 6-7 (in slides), consider what happens when industry demand D increases. For instance,
suppose that this is the market for cars, and lower gasoline prices generate higher demand D.
a. Redraw Figure 6-7 for the Home market and show the shift in the D/ ! curve and the new shortrun equilibrium.
b. From the new short-run equilibrium, is there exit or entry of firms, and why?
c. Describe where the new long-run equilibrium occurs, and explain what has happened to the
number of firms and the prices they charge.
10.Suppose Home is a small country. Use the graphs below to answer the questions:
a. Calculate Home consumer surplus and producer surplus in the absence of trade.
b. Now suppose that Home engages in trade and faces the world price, P* = $6. Determine the
consumer and producer surplus under free trade. Does Home benefit from trade? Explain.
c. Concerned about the welfare of the local producers, the Home government imposes a tariff in the
amount of $2 (i.e., t = $2). Determine the net effect of the tariff on the Home economy.
11. Suppose the Home firm is considering whether to enter the Foreign market. Assume that the
Home firm has the following costs and demand:
Fixed costs = $140
Marginal costs = $10 per unit
Local price = $25
Local quantity = 20
Export price = $15
Export quantity = 10
a. Calculate the firm’s total costs from selling only in the local market.
b. What is the firm’s average cost from selling only in the local market?
c. Calculate the firm’s profit from selling only in the local market.
d. Should the Home firm enter the Foreign market? Briefly explain why.
e. Calculate the firm’s profit from selling to both markets.
f. Is the Home firm dumping? Briefly explain.

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