The following table shows the output of rice and pencil one labor hour can produce in Malaysia and Indonesia:

Malaysia : Rice - 1 Pencil - 3

Indonesia : Rice - 2 Pencil - 4

In Malaysia, what are the marginal products of labor in rice and pencil production, respectively? In Indonesia, what are the marginal products of labor in rice and pencil production, respectively?

• Which country has an absolute advantage in rice and which country has an absolute advantage in pencils? 
• What is the autarkic price ratio of rice relative to pencils in each country?
• Which country has a comparative advantage in rice and which country has a comparative advantage in pencils?
• Suppose the Malaysia has 1,000 labor hours available. Construct the production-possibilities frontier (PPF) and identify the optimal autarky equilibrium (using an indifference curve) for Malaysia. 
• Suppose the international price is set at 1 rice:2.5 pencil and Malaysia decides to completely specialize at producing the product in which it has a comparative advantage. How would the above graph change? Use the graph to show the gains from trade and the export and import quantities. For each unit of export good, how much is Malaysia's gain (measured in terms of the other good)?
• Discussion: What are the key assumptions of the model that could lead to a discrepancy between the model's predictions in g. and the empirical evidence?

Answer rating: 100% (QA)

To answer these questions lets start by calculating the marginal products of labor MPL for rice and pencils in both Malaysia and Indonesia Marginal Pr... View the full answer