Homework Chapter 3

Fall 2021

Problem I:
Let's examine a trade agreement between U.S and Mexico. We will examine a simple two goods
case, brooms and microchips. Each country has 10 workers who can produce either microchips or
brooms. A worker in U.S can produce 9 microchips a day or 1 broom a day. A worker in Mexico
can produce 1 microchip or 9 brooms a day.
The following table defines the production possibilities of two countries
Output per worker
U. S Mexico
Microchips 9 1
Brooms 1 9

a) Draw the production possibilities frontier (PPF) of microchips and brooms for U.S.
b) Draw the production possibilities frontier (PPF) of microchips and brooms for Mexico.
c) Which country has an absolute advantage in the production of Microchips and Broom?
d) Which country has a comparative advantage in producing Microchips and Broom?
e) If the both countries decide to trade with each other, which product each will export?
f) Deduce the range of prices at which trade can happen.

Problem II:
For the table below, answer the following:
Output per hour of labor

Germany France

Airplane 3 2

Car 12 4

a) How much time is required to produce only one airplane and one car in Germany?
b) How much time is required to produce only one airplane and one car in France?
c) Deduce the absolute advantage of each product for both economies.
d) Determine the comparative advantage of both economies? Explain your answer.
e) What is the range of prices at which trade can occur concerning airplane?