International Business Strategy

Problem Set 2
International Trade

Question 1

Japan (J) is endowed with 40 units of labor and France (F) is endowed
with 60 units of labor. Both countries can produce cars (C) and radios (R)
with the following labor coefficients: aJC = 8, aJR = 2, aFC = 10, and aFR = 1k.

(a) Which country exports cars and which countries exports radios if both
countries can trade with each other? Determine the aggregate quanti-
ties of production if both countries completely specialize according to
their comparative advantage.

(b) Assume now that the labor coefficient for radios in Japan declines to
(i) aJR = 1 or (ii) aJR = 1/2 . How do production quantities change in
the free trade equilibrium?

Question 2
Consider a small open economy that can produce the two goods 1 and 2
under perfect competition and can trade these goods for a given relative
price p1 /p2 = 1. The labor coefficients are a1 = 4 and a2 = 3.

(a) Which good is exported by the country?

(b) Show graphically that the country can maximize its consumption pos-
sibilities by specializing completely on its export good.

Question 3
The countries A and B can produce strawberries and raspberries. If country
A is specialized completely on strawberries, it can produce 120 tons of straw-
berries; if it specializes on raspberries, it can produce 30 tons of raspberries.
The maximum production quantities of country B are 150 tons of straw-
berries or 50 tons of raspberries. For which good does country A have a
comparative advantage?

RWTH Aachen University Winter Term 2023/2024

 International Business Strategy

Question 4
Consider the two countries Anda and Lusia with the two production factors:
land and labor. Lusia is endowed with more land per worker than Anda. Each
country can produce cereals (land intensive) or textiles (labor intensive).
Technology and relative demand is the same in both countries. Which country
exports textiles?

Question 5
Discuss how the concepts that may explain international trade of goods can
be applied to explain US exports of computers.

Question 6
Consider two symmetric countries. There are two telecommunication service
providers, one based in each country. Costs of these two providers are given
by C = 1 + 2qd + 2qf and C ∗ = 1 + 2qd∗ + 2qf∗ , respectively. The terms qd and
qf stand for the number of domestic and foreign customers of each provider.
Demand is given by p = 12 − qd − qf∗ and p∗ = 12 − qd∗ − qf , where p and p∗
denote a flat-rate service fee per customer.

(a) Derive the autarky values of q and p (i.e., for qf = qf∗ = 0).

(b) Determine the equilibrium price and the number of customers if both
firms can provide their services in the foreign country as well.

RWTH Aachen University Winter Term 2023/2024