Question

1. Use the specific-factors model to answer question 1. Assume that there are two industries, agriculture and manufacturing. The agricultural industry uses labor and land as inputs while the manufacturing industry uses labor and capital as inputs. The production function for each good is as follows:

Agriculture Production Function

Land              Labor          Q_A           

20              0                0

20              1               12        

20              2               22        

20              3              30        

20              4              36        

20              5              40

20              6               42        

Manufacturing Production Function

Capital        Labor             Q_M           

20              0                0

20              1               12        

20              2               22        

20              3              30        

20              4               36        

20              5              40

20              6               42        

a. Assume that the economy has 6 workers. Draw the production possibilities frontier with manufacturing output on the horizontal axis and agricultural output on the vertical axis. Show the values of the horizontal and vertical intercepts and the coordinates of at least two other points of the PPF.

b. Suppose before trade P_M and P_A are equal to one. How much agricultural and manufacturing output should the economy produce? How much revenue would firms make?

c. Draw the price line on the PPF graph that shows the optimum output combination in part b.

d. Suppose that after trade P_M is equal to two and P_A is equal to one. How much of each good should the economy produce?

e. Draw the price line on the PPF graph that shows the optimum output combination in part d.

f. Suppose after trade the consumption of manufacturing goods is equal to 30. What is the quantity of manufacturing exports?

g. What is the quantity of agricultural imports? (Hint: remember that the price of exports times the quantity of exports must equal the price of imports times the quantity of imports).

h. Bonus. What is the consumption of agricultural goods after trade?

Answer 1

Solution: