Practice Questions Chapter 1 1. People respond to incentives ...

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. Graph the production possibilities frontier for each country in Exhibit 3.Exhibit 3c. What is the opportunity cost of a computer in Germany? What is theopportunity cost of a tonne of grain in Germany?d. What is the opportunity cost of a computer in Poland? What is theopportunity cost of a ton of grain in Poland?e. Which country has the absolute advantage in producing computers?Grain?f. Which country has the comparative advantage in producingcomputers? Grain?g. Each country should tend toward specialization in the production ofwhich good? Why?h. What is the range of prices for computers and grain for which bothcountries would benefit from trading with each other?i. Suppose Germany and Poland settle on a price of 2 computers for 1tonne of grain or 1/2 tonne of grain for a computer. Suppose eachcountry specializes in production and they trade 4 computers for 2tonnes of grain. Plot the final consumption points on the graphs youmade in part (b) above. Are these countries consuming inside oroutside of their production possibilities frontier?j. Suppose the productivity of a worker in Poland doubles so that aworker can produce 8 computers or 8 tonnes of grain per month. Whichcountry has the absolute advantage in producing computers? Grain?k. After the doubling of productivity in Poland, which country has acomparative advantage in producing computers? Grain? Has thecomparative advantage changed? Has the material welfare of eithercountry changed?Practice Questions to accompany Mankiw & Taylor: Economics 6
l. How would your analysis change if you assumed, more realistically,that each country had 10 million workers?3. Suppose a worker in the United States can produce 4 cars or 20computers per month while a worker in Russia can produce 1 car or 5computers per month. Again, for simplicity, assume each country hasonly one worker.a. Fill out the following table:b. Which country has the absolute advantage in the production of cars?Computers?c. Which country has the comparative advantage in the production ofcars? Computers?d. Are there any gains to be made from trade? Why?e. Does your answer in (d) above help you pinpoint a source for gainsfrom trade?f. What might make two countries have different opportunity costs ofproduction? (Use your imagination. This was not directly discussed inChapter 3.)Practice Questions to accompany Mankiw & Taylor: Economics 7
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Practice Questions Chapter 1 1. People respond to incentives ...

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