Answer sheet

1.

i

ii. Public goods are reduce from 40 to 30 so the additional 30 private goods 10 private goods.

iii. Total Cost/ #units = 10 public goods/30 private goods

or on private good cost 1/3 public goods

iv. On graph above 25 public goods and 20 private goods is noted as point iv.

5. Point v on graph above is beyond the PPF.

2. Salantio Family

Czeno Family

From this we can see that if we wished to put the cost in terms of a unit of crops,

For the Salantio family the cost of a unit of crops would be one 1/4 unit of cloth.

For the Czeno family the cost of a unit of crops would 1 unit of cloth.

-Does either family have a comparative advantage in the production of clothing? In crops? Explain.

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Comparative advantage in clothing falls to the Czeno family (their cost is 1 unit of crops whereas it costs the Salantio family 4 units of crops)

Comparative advantage in crops must therefore fall to the Salantio family (the cost to them is 1/4 clothing, where the Czeno family must give up 1 unit of clothing).

-At what prices would trade be mutually advantageous?

Expressed in terms of clothing any price less than 4 units but more than 1 unit of crops would be beneficial to both parties.

Expressed in terms of crops, the price would have be more than 1/4 , but less than 1 unit of clothing per unit of crops.

Salantio family starts with 60 units of crops and 0 clothing. It trades 20 units of crops for 10 clothing and thus ends up with 40 in crops and 10 in clothing.

Czeno family starts with 40 units in clothing and 0 in crops. It trade 10 units of clothing for 20 units of crops and thus ends up with 30 units clothing and 20 crops

Without trade, Salantio would have only 5 in clothing when it produced 40 in crops (clearly it is better off by 5 units of clothing).

Without trade Czeno would have only 10 units in crops when it produced 30 units of clothing (now they have 20 crops and are therefore better off by 10 units of crops).

No, since the possible prices lie between 4 and 1 unit of crops for each unit of clothing, transportation cost absorbs all the difference in costs between the two parties (4-1=3) and no price can be found which benefits both parties simultaneously.

Assuming, as the question does, that services require more skilled labor, than the demand for Amazonian services will increase the incomes of its skilled labor and decrease demand for unskilled labor there. Thus Amazonia will have find its intenal distribution of income more unequal as incomes rise for skilled workers (already better paid than unskilled workers) and fall for the unskilled.

Ozonia, on the other hand, has a comparative advantage in production goods, which by our assumptions depends more heavily upon unskilled labor. The consequence is that production goods in Ozonia will be traded for Amazonian labor. That means demand for unskilled workers will rise relative to those of the skilled workers, making incomes differences between the two groups smaller.

What happens to international equality would depend upon whether Amazonia's skilled workers were already better paid than those of Ozonia. If so, than international inequality would rise for skilled workers. Likewise if Amazonia's unskilled workers previously paid less than Ozonia's unskilled workers, than trade would increase the international pay differences for unskilled workers as well)

Grist for the Mill?

Why do price differences persist? It is true that we expect international trade to begin to erode price and income differences (we call this convergence or purchasing power parity). Yet, for a variety of reasons trade does not always work efficiently. That is the heart of the development question. Some scholars point to culture, others to trade barriers, and still others to exploitive international relationships.

Is speciailization always beneficial? Specialization poses a series of risks. If the price of the good a nation specializes in is stable, then the risk is less consequential. However, a further problem is that specialization may inhibit learning that contributes to new sources of development. In a dynamic world, specialization can leave one country with a very traditional production system while others learn to use more sophisticated technologies.