Problem Set #2: ECON 2206 F 2021

Comparative Advantage and Trade

1. Comparative Advantage: Refer to your answers to Question 5 on your Chapter 3 Pre-lecture Assignment to answer

the following questions. If you are not confident your answer to Question 5 on your Chapter 3 Pre-lecture, be sure

to double check them (perhaps with me or on the discussion board.) It is likely that they were not graded for

correctness on the pre-lecture.

a. Who has the absolute advantage in producing cars? How do you know this? Explain using the numbers from the statement of the problem.

b. Plug in your MOCs from the Chapter 3 pre-lecture assignment into the following table. Be sure to add labels. For example, if you are calculating the MOC for one boat, the label will be in terms of cars and vice versa. Your answers to the next questions need to be justified with the numbers in the table, so be sure to enter your answers with care.

c. Who has the comparative advantage in producing boats? How you know this? Support your answer with numbers from your table above.

d. Who should specialize in producing boats? Why?

e. Who should specialize in producing cars? Why? Support your answer with numbers from your table above.

Marginal Opportunity Cost to produce:

one Boat one Car

Germany

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Per Unit Trade Price (use this in part f.)

Italy

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f. Each of the next two questions have a proposed trade. Think about what the per unit trade amounts are and how they compare to each country’s MOC, then answer the questions (hint: I cover this towards the end of the lecture and I use a table like the one above):

i. Would both countries agree to trade 1 car for 1 boat? Explain how you know this. If they don’t make the trade, who does not agree and why?

ii. Would both agree to trade 2 cars for 1 boat? Explain how you know this. If they don’t make the trade, who does not agree and why?