05 Jun Question Last Name ______________________________________ First Name ________________________ Economics 238 New York University
Question
Last Name ______________________________________ First Name ________________________
Economics 238 New York University
Marc Lieberman Spring, 2012
Problem Set #2
The RicardianGeneral Equilibrium Model
Instructions: Print out this problem set and neatly PRINT your name at the top. Some of your answers will go on these pages. Staple all three pages of the problem set to your other answers before turning them in (on Monday, Feb 13at the beginning of lecture). Also put your name on each page of your answers.
The recitation sections on Thursday, Feb 9, will show you how to solve problems similar to these.
Make a photocopy of the problem set, because you will not be getting it back. Turn in your original, NOT the photocopy. You’ll use the photocopy to check against the answers to be posted after they are turned in..
One of the side benefits that would come from long-term peace in the Middle East is the opening up of trade between Israel and its Arab neighbors. For example, currently there is only limited trading between Israel—a high-productivity country (high output per hour), and Egypt—a low-productivity country. But a comprehensive peace would open up full and extensive trade between the two nations. This problem set uses this scenario to work through the Ricardian model for these two countries, with hypothetical numbers.
Suppose the potential for trade exists in only two goods: cotton and oranges. Assume the following information on technology in each country (labor hours required per unit of output) and resource endowments (total labor hours available per period):
Egypt
Israel
1 ton cotton
100 hrs
20 hrs
1 ton oranges
500 hrs
20 hrs
Total Labor
Hours Available
3,000
million
500
million
For all numerical solutions, show all your work neatly and circle your final answers.
1. Which country has an absolute advantage in producing cotton? …in producing oranges?
2. What is the opportunity cost of producing one more ton of cotton in Israel? In Egypt?
3. What is the opportunity cost of producing one more ton of oranges in Israel? In Egypt?
4. Which country has a comparative advantage in producing cotton? …in producing oranges? Briefly, how do you know?
_________________________________
So far, we’ve only considered production (supply) in each country. Now let’s consider consumption, which is based on demand.
Let QDEgypt and QDIsrael represent the number of millions of tons of oranges Egyptians and Israelis, respectively, would want to buy at each relative price for oranges. Also, let PO be the price per ton of oranges, and PCbe the price per ton of cotton. Finally, suppose that the demand curve for oranges in each country is as given in the tab
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