EC 340

Problem Set #1 - Comparative Advantage

Due by the end of class on January 19.


1. Suppose that the U.S. has an endowment of 30 units of labor and 20 units of capital whereas the rest of the world has 100 units of labor and 60 units of capital. Is the U.S. labor abundant? Is the U.S. capital abundant?

2. Assume that the tables below give combinations of the number of bottles of Kahlua and bottles of champagne that France and Mexico would be able to produce in one week using equivalent amounts of resources.

       Mexico                    France           

champagne    Kahlua       champagne   Kahlua

    10          0             50         0
     8          2             40         5
     6          4             30        10
     4          6             20        15
     2          8             10        20
     0         10              0        25



a. Which country has an absolute advantage in the production of champagne?
b. Which country has an absolute advantage in the production of Kahlua?
c. Which country has a comparative advantage in the production of champagne?
d. Which country has a comparative advantage in the production of Kahlua?

3. Consider the following domestic supply and demand schedules for desk calendars:

     demand              supply

 price  quantity     price  quantity

  $5       0          $5      15
   4       2           4      12
   3       4           3       9
   2       6           2       6
   1       8           1       3
   0      10           0       0


Suppose that the country opens up to free trade and that the world price of desk calendars is $1. Calculate the net effects on consumers surplus, producers surplus, and national welfare of this move to free trade in desk calendars.

4. Using the production possibilities curve/indifference curve diagram, illustrate and explain why it is beneficial for a country to move from autarky (no international trade) to free trade. Be sure to indicate and discuss the old and new production and consumption points on your diagram.


Click here for the answers.



David A. Latzko
318 COB
Department of Business and Economics
Wilkes University
Wilkes-Barre, PA 18766
phone: (717) 408-4718
fax: (717) 408-4917
dlatzko@wilkes.edu
wilkes1.wilkes.edu/~dlatzko