# Assume there are two countries in the world, Highland (H)

Assume there are two countries in the world, Highland (H) and lowland (L).  Both countries are initially self-sufficient in that they do not trade with each other, a condition called "autarky."  Each country produces wooden cabinets (W) and pounds of chocolate (C).  Wages and capital costs are the same in both industries.
1.  In country H, it takes 25 workers to produce 50 W's per week but it takes 50 workers to produce 50 pounds of C per week.
1a.  All else held constant, for which good is labor productivity greater?
1b.  Assuming the same capital structures in both industries, which good will have the lower average per unit cost to produce?
1c.  Using 50 workers per week to produce both goods, how many W's and how many pounds of C can country H produce each week?  Graph this using constant cost (straight line) production possibility frontiers.  (for each nation H and L, put one good (W or C) on each of the two axis -- the same respective way for each nation -- and draw a negatively sloped line between the maximum outputs for each good on each axis.  This will give you the straight line production possibilities curves for each nation.)  This might look like:

Nation H:  Put W on the vertical axis and C on the horizontal axis.  Draw a negatively sloped line between the maximum output of W and C.
Nation L:  Put W on the vertical axis and C on the horizontal axis.  Draw a negatively sloped line between the maximum output of W and C.

1d.  If 100W = 50C, what is the opportunity cost of 1W in terms of pounds of C?
1e.  What is the opportunity cost of 1C in terms of units of W?
1f.  Which good has the lowest opportunity cost to produce and is this the same good that has the lowest average per unit cost in production?
2.  In country L, it takes 50 workers per week to produce 50 W's, but only 25 workers per week to produce 50 pounds of C.
2a. All else held constant, for which good is labor productivity greater?
2b. Assuming the same capital structures in both industries, which good will have the lower average per unit cost to produce?
2c. Using 50 workers per week to produce both goods, how many W's and how many pounds of C can country L produce each week?  Graph this using constant cost (straight line) production possibility frontiers.
2d. If 50W = 100C, what is the opportunity cost of 1W in terms of pounds of C?
2e. What is the opportunity cost of 1C in terms of units of W?
2f. Which good has the lowest opportunity cost to produce and is this the same good that has the lowest average per unit cost in production?
3.  In autarky (a condition of isolation or self-sufficiency), country H produces 50 W's and 25 pounds of C per week while country L produces 25 W's and 50 pounds of C per week.  Graph the autarky situation for each nation by using constant cost (straight line) production possibility frontiers.
3a.  What is total world output per week of W and C?
3b.  If country H specializes completely in the good it producers relatively cheaper (assume that the more efficient industry hires all the displaced workers from the less efficient industry) and country L specializes completely in the good it produces relatively cheaper (it also hires into the more efficient industry all the displaced workers from the less efficient industry), what then is total world output?
3c.  If both countries abandon autarky and country H and exports 50 W's to country L in exchange for 50 pounds of C from country L, how much will each country's level of consumption change?  Graph this new level of consumption relative to the autarky constant cost (straight line) production possibility frontiers for each nation.
4.  If specialization and trade increase the supply of W's and pounds of C in both country's H and L relative to the same number as workers/consumers (i.e., demand stays the same), what will happen to the prices of W and C in each country?
5.  What will it cost each nation to revert to autarky in order to protect the jobs of those workers in each nation's relatively less efficient industry?

Related Book For Macroeconomics

3rd edition

Authors: Charles I. Jones

ISBN: 978-0393923902

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