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(solution) Please show work even the easiest of multiplication as well as

Please show work even the easiest of multiplication as well as some commentary. Thank you.

International Political Economy

Problem Set #1

Post your work online, either typed or a photo of hand-done work. You are being graded for

completeness and effort. You can work with classmates, but must write up your own work.

SHOW ALL YOUR WORK! If you find an amount by doing multiplication or division, show

that.

Economics of International Trade

1. Home has 1,000 units of labor available. It can produce two goods, Hats and Jackets. The

unit labor requirement in Hat production is 5 (it takes 5 labor units to make one Hat),

while in Jacket production it is 10 (it takes 10 labor units to make one Jacket).

a. What is the most Hats Home can produce/consume?

b. What is the most Jackets Home can produce/consume?

c. Graph Home?s production possibility frontier (PPF). Be sure to label the axes. 2. There is another country, Foreign, with a labor force of 500. Foreign?s unit labor

requirement in Hat production is 1, while in Jacket production it is 5.

a. What is the most Hats Foreign can produce/consume?

b. What is the most Jackets Foreign can produce/consume?

c. Graph Foreign?s production possibility frontier (PPF). Be sure to label the axes. 3. Fill in the opportunity costs in the following table. Be sure to include the units (i.e., Hats

or Jackets). Price/Opp?ty cost of Hats Price/Opp?ty cost of Jackets HOME FOREIGN 4. Based on the information in Questions 1 and 2,

a. Does Home or Foreign have an absolute advantage in making Hats? (i.e., who

make more Hats with fewer labor units)

b. Does Home or Foreign have an absolute advantage in making Jackets? c. Based on absolute advantage, who can you predict will export and/or import Hats

and/or Jackets? 5. Based on the information in Question 3,

a. Does Home or Foreign have a comparative advantage in making Hats? (i.e.,

which country has a lower opportunity cost in terms of Jackets)

b. Does Home or Foreign have a comparative advantage in making Jackets?

c. Based on comparative advantage, who can you predict will export and/or import

Hats and/or Jackets? 6. Assume that the demand for Hats and Jackets in both Home and Foreign is such that they

negotiate a price that a Jackets trades for 4 Hats (and a Hat trades for ¼ Jacket).

a. What is the most Hats Home can consume with trade? (Assume for now that

Foreign can fully satisfy any trade demands from Home) b. What is the most Jackets Home can consume with trade? (Assume for now that

Foreign can fully satisfy any trade demands from Home)

c. What is the most Hats Foreign can consume with trade? (Assume for now that

Foreign can fully satisfy any trade demands from Home)

d. What is the most Jackets Foreign can consume with trade? (Assume for now that

Foreign can fully satisfy any trade demands from Home)

e. On two separate graphs, redraw the production possibility frontier for Home and

Foreign in autarky (Hint: these graphs will be identical to those you drew for

Questions 1 and 2). Then draw a line showing how much each country can

consume through a combination of production and trade. (The endpoints will be

how much they can consume if they produce one product and don?t trade at all,

and how much they can consume if they produce one product sell all of it to buy

from the other country. Continue to assume for now that each country can satisfy

any trade demands of the other country.) Be sure to label axes, and which is

Home and which Foreign. f. Will both countries be able satisfy the trade demands of the other country? If not,

which country will not be able to produce enough Hats or Jackets for the other

country, if the international price is 4 Hats per Jackets (and ¼ Jacket per Hat)? g. Re-draw the PPF for the country who will not be able to import all of the Hats or

Jackets it would like to at the price of 4 Hats per Jacket (and ¼ Jacket per Hat). If

you can?t calculate the exact intercept, then just draw a line that shows

approximately where the correct PPF should be. h. Which country can consume more with trade than without trade? Why? BONUS QUESTION #1: Repeat the analysis from Question 6, but now assume that the

international price for is 3 Hats per Jacket. BONUS QUESTION#2: If a country changes its policies from closed to open, how will this

affect economic growth in the short term vs. the long term? Why? Practice with Simultaneous Games

A. For each game, identify all possible Pareto improvements (put an arrow from one

outcome set of payoffs to another to show a Pareto improvement).

B. Indicate which outcomes are Pareto Efficient/Optimal by writing ?PE? in the relevant

box(es).

C. Find the (Pure Strategy) Nash Equilibrium/a for each game by circling the best payoff

available for each decision by the other player. Two circled payoffs in a cell indicate a

NE. Write the NE as a strategy for each player.

D. State whether each Nash Equilibrium is Pareto Efficient or not. Explain you reasoning.

1. Odd Couple game

Felix Oscar Clean Relax Clean 2, 8 0, 2 Relax 6, 4 8, 0 2. Texting while driving game

Driver 2 Driver 1 Text Don?t text Text -1, -1 0, 3 Don?t text 0, 3 2, 2 3. Fishing game

Fisher 2 Fisher 1 Catch lots Catch few Catch lots 2, 2 4, 1 Catch few 1, 4 3, 3 BONUS QUESTION: Scarce dessert resources game

Kid 2 Kid 1 Eat ice cream Eat cake Eat ice cream 4, 4 8, 10 Eat cake 10, 8 5, 5

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