When one nation can produce a product at a lower cost relative to another nation it is said to have?

Econ 11

Prof Woolf

Homework 1   Due Jan 31, 2005

Please note:  Please submit your homeworks typed, not hand written.  You can do any graphs by hand, but other answers should be typed.   Also note that I have added a new Part III to this assignment on Jan 28.

Part I.

Read the following:  http://www.panarchy.org/bastiat/petition.eng.1845.html

Briefly (1 or 2 sentences)  answer the following questions:

1.  Who is the competitor that the candle makers are complaining about?

The competitor is the sun.

2.  Why is the competitor unfair?

The sun is unfair because it can produce its product (light) at an unfairly low price because it has “superior conditions”, that is, better technology.  This is hurting the candlemakers of France. 

3.  Who benefits from the competition that the candle makers face?

Anyone who uses light; that is, all consumers.

4.  Who is hurt by the competition?

Candle makers, as well as all the other producers that would create lots of jobs if the competition was banned.  There would be more jobs for farmers of vegetable oil products that go into lanterns, more jobs for orchadists who would plant trees that were rich in resin, more jobs in the shipping industry to hunt and harvest whales for their oil.  There would also be more jobs in the candlestick industry and other industries that build and maintain candles and lanterns. 

5.  If you were the king of France in the 1840s, what would you have done if presented with this petition?

Laugh at it and toss it out.   Or maybe use it for a homework assignment for a principles of economics class.

Part II. 

Chapter 3  Questions for Review 1 and 4

1.  Absolute advantage means someone, or some firm, or some country, can produce a product at a lower overall cost than another producer.  Comparative advantage means that some producer can produce at a lower opportunity cost than another.  This distinction is important.  A lower opportunity cost simply means that one producer gives up less than another in order to produce the good.

4.  A nation will tend to export goods for which it has a comparative advantage.  Since comparative advantage is a relative concept, and in this case it is relative to other nations, having a comparative advantage means you give up relatively fewer alternative goods than another country, so it is relatively cheaper for your country to produce the good.

Chapter 3 Problems and applications  problems 3 and 9

3.  American and Japanese workers can each produce 4 cars per year.  An American worker can produce 10 tons of grain and a Japanese worker 5 tons of grain.  There are 100 million workers in each nation.

a. 

b.

Note that both are linear production possibility frontiers since there is a constant tradeoff between grain and cars for both nations.

c. 

The opportunity cost of one car in the US is the amount of grain that worker cannot produce.  Since a US worker can produce either 4 cars or 10 tons of grain per year, if she produces 1 more car, she can’t produce 10/4 or 2.5 tons of grain.  If she produces one more ton of grain, she can’t produce 0.4 cars.

In Japan the opportunity cost of producing one more car is not being able to produce 5/4 or 1.25 tons of grain.  If that worker instead produces one more ton of grain, she can’t produce 4/5 of a car, or 0.8 cars.

d.  The US has an absolute advantage in producing grain.  Neither country has an absolute advantage in the production of cars.

e.  The U.S. has a comparative advantage in producing grain and Japan in cars.  In the US, a car is twice as expensive as in Japan.  It costs 2.5 tons of grain to buy a car in the U.S., but only 1.25 tons in Japan.  In Japan, a ton of grain is twice as expensive as it is in the U.S.

f.  If half the workers in each nation produce cars and half grain, Japan produces 50 million workers x 4 cars/worker = 200 million cars and 50 million workers x 5 tons of grain/worker = 250 million tons of grain.

The US produces 50 million workers x 4 cars per worker = 200 million cars and 50 million workers x 10 tons of grain/worker = 500 million tons of grain.

g.  Suppose, starting at the initial situation in part (f)  the U.S. takes 25 million workers out of car production and puts them into grain production.  The US now produces 100 million cars and 750 million tons of grain.

Suppose Japan takes 25 million workers out of grain production and has them produce cars.  They now produce 300 million cars and 125 million tons of grain.

9.  All goods can be produced with fewer workers in Germany than in France.  

a.  The cost of all goods is lower in Germany because it takes fewer resources to produce the goods.  Germany has an absolute advantage.

b.  But France still has a comparative advantage because they are less inefficient at the production of some goods.

c.  Both countries would benefit by trading.  Even though everything is less costly in Germany, if the Germans specialize in producing what they have a comparative advantage in and French specialize in what they have a comparative advantage in, they can trade and both consume more than they can produce and consume without trade.

Part III.

We will be beginning a stock market simulation activity in about 10 days.  You will work on teams of 3 people.  You each need to find a group of three people to work with for this exercise, which will last for 10 weeks.  For Part III of the homeowrk, write down the three people on your team and their emails addresses.