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Ecn450 Week 1 Chapter 2 Problems

  • Date Submitted: 01/31/2016 08:40 AM
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ecn450 week 1 Chapter 2 Problems

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Complete "Study Questions" 12, 13, and 14 at the end of chapter 2 in the textbook.

12. The maximum amount of steel or aluminum
that Canada and France can produce if they
fully use all the factors of production at their
disposal with the best technology available to
them is shown (hypothetically) in Table 2.8.
Assume that production occurs under
constant-cost conditions. On graph paper,
draw the production possibilities schedules
for Canada and France; locate aluminum on
the horizontal axis and steel on the vertical
axis of each country’s graph. In the absence of
trade, assume that Canada produces and consumes
600 tons of aluminum and 300 tons of
Table 2.8
Steel and Aluminum Production
Canada France
Steel (tons) 500 1,200
Aluminum (tons) 1,500 800
steel and that France produces and consumes
400 tons of aluminum and 600 tons of steel.
Denote these autarky points on each nation’s
production possibilities schedule.
a. Determine the MRT of steel into aluminum
for each nation. According to the principle
of comparative advantage, should the two
nations specialize? If so, which product
should each country produce? Will the extent
of specialization be complete or partial?
Denote each nation’s specialization point on
its production possibilities schedule. Compared
to the output of steel and aluminum
that occurs in the absence of trade, does
specialization yield increases in output? If
so, by how much?
b. Within what limits will the terms of trade
lie if specialization and trade occur?
Suppose Canada and France agree to a
terms?of?trade ratio of 1:1 (1 ton of steel = 1
ton of aluminum). Draw the terms?of?trade
line in the diagram of each nation. Assuming
that 500 tons of steel are traded for 500steel and that France produces and consumes
400 tons of aluminum and 600 tons of steel.
Denote these autarky...


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