International Economics: Homework 2

Chapter 3:

1) Given the input-output relationships in the table below:

Countries

A B

Goods

X 8 4

Y 4 1

a. Which country has absolute advantage in which good and why?

b. Which country has comparative advantage in which good and why?

c. If A is endowed with 8000 hours of labor, how much X will it produce after trade begins? How much Y? Explain.

d. What is the allowable range on A's wages relative to B's if trade is flowing between these two countries according to comparative advantage?

2) Using a demand and supply diagram, illustrate the effects of a tariff on imports.

a. Show the effect on prices. Label the pre-tariff price and price with the tariff.

b. Show the effect on domestic production. Label the pre-tariff production and domestic production with the tariff.

c. Show the effect on domestic consumption. Label the pre-tariff consumption and domestic consumption with the tariff.

d. Show the effect on imports.

e. Show the effect on consumer welfare using letters a, b, c, and d.

f. Show the effect on producer welfare.

g. Show the area of government revenue with the tariff.

h. Show the decline of total economic welfare.

3) Quotas

a. Under what circumstances will tariffs and quotas yield different results for government revenue?

b. Under what circumstances will tariffs and quotas yield essentially the same results for government revenue?