1. Robinson Crusoe can gather 10 coconuts or catch 1 fish per hour.

His friend Friday can gather 30 coconuts or catch 2 fish per hour.
What is Crusoe’s opportunity cost of catching 1 fish? What is
Friday’s? Who has an absolute advantage in catching fish? Who has
a comparative advantage in catching fish?
Crusoe's opportunity cost of catching on fish is 10 coconuts since he can
gather 10 coconuts in the same amount of time it takes to catch one fish.
Friday's opportunity cost of catching one fish is 15 coconuts since he can
gather 30 coconuts in the same amount of time it takes to catch two fish.
Friday has an absolute advantage in catching fish since he can catch two
per hour, while Crusoe can catch one per hour. But Crusoe has a
comparative advantage in catching fish since his opportunity cost of
catching a fish is less than Friday's.

2. Suppose that a skilled brain surgeon also happens to be the world’s

fastest typist. Should she do her own typing or hire a secretary?
Explain.
The skilled brain surgeon gets an absolute advantage in typing, but her
opportunity cost of typing is substantially high (giving up treating people,
wasting time, and earning more money), so she should hire a secretary.
The secretary opportunity cost of typing is a lot smaller than the surgeon
(for example $15 instead of $150), so he gets a comparative advantage.

3. The textile industry of Autarka advocates a ban on the import of

wool suits. Describe five arguments its lobbyists might make. Give a
response to each of these arguments.
(1) The Jobs Argument: imports of wool suits destroy domestic jobs. (2)
National security argument: The wool suit industry is vital for national
security. (3) The infant industry argument: the wool-suited industry is just
starting up and needs protection from foreign competition unit it gets
stronger. (4) The unfair competition argument: other countries are
unfairly subsidizing their wool suit industries. (5) The protection as a
bargaining chip: the ban on importation of wool suits can be used as a
bargaining chip in international negotiations.
Defending:
(1) free trade creates jobs in some industries even as it destroys jobs in
the wool suit industry and allows Autarka to enjoy a higher standard of
living. (2) the role of wool suits in the military might be exaggerated. (3)
Government protection is not needed for an industry to grow on its own.
(4) it would be good for the citizens of Autarka to be able to buy wool
suits at a subsidized price. (5) threats against free trade my backfire,
leading to lower levels of trade and lower economic welfare for everyone.

4. Consider a small country that exports steel. Suppose that a “pro-

trade” government decides to subsidize the export of steel by paying
a certain amount for each ton sold abroad. How does this export
subsidy affect the domestic price of steel, the quantity of steel
produced, the quantity of steel consumed, and the quantity of steel
exported? How does it affect consumer surplus, producer surplus,
government revenue, and total surplus? Is it a good policy from the
standpoint of economic efficiency? (Hint: The analysis of an export
subsidy is similar to the analysis of a tariff.)
- The export subsidy makes the domestic prices of steel increase to
minimize its consumption in the domestic market and increase its
consumption in foreign markets because it decreases the selling price of
steel to foreign importers. Therefore, the quantity of steel produced is
likely to increase due to increased demand in foreign markets. The
amount of steel exported is expected to appreciate due to its affordability
to foreign importers.
- Consumer surplus is likely to decrease when the export subsidy of steel
is imposed because consumers in the exporting country will decrease
their consumption due to the increased steel price in the domestic
markets. In addition, the producer surplus will increase after imposing the
export subsidy of steel because it increases its demand in foreign nations.
Eventually, government revenue will increase because more taxes will be
earned from the increased exportation of steel to foreign markets. The
total surplus will only favor the domestic producers than consumers
because they are exposed to higher prices that limit their purchasing
power. In contrast, the producers are exposed to new markets and
customers to make more profits.
- It is a good policy because increased exportation of steel will enable the
government to earn more revenues to fund diverse development projects
and minimize existing debts. Besides, increased exportation of steel
enables the producers to earn more profits that are channeled to fund their
diversification and advancement projects, leading to the increment of job
opportunities.