Question

This question has 12 parts and a graph to be submitted separately. Be sure to answer them​ all!

Norway and the U.S. each produce steel and timber according to the following​ schedule:

	Steel	Timber
Norway	7	14
United States	8	32

1. Which country has the absolute advantage in

steel​?

A.

Both

B.

Norway

C.

United States

D.

Neither

2. Which country has the absolute advantage in​ timber?

A.

United States

B.

Norway

C.

Both

D.

Neither

3. Which country has the comparative advantage in​ steel?

A.

Neither

B.

United States

C.

Norway

D.

Both

4. Which country has the comparative advantage in

timber​?

A.

Norway

B.

Both

C.

United States

D.

Neither

5. Which of the following statements best reflects this​ situation?

A.

While trade is always beneficial for less productive​ countries, more productive countries rarely benefit and have no incentive to trade.

B.

Regardless of whether a country has one or two of the comparative​ advantages, both countries can benefit from trade.

C.

While trade is always beneficial for more productive​ countries, less productive countries rarely benefit and have no incentive to trade.

D.

Regardless of whether a country has one or two of the absolute​ advantages, both countries can benefit from trade.

6. Who would be most likely to recommend to these two nations that they engage in​ trade?

A.

Only David Ricardo and Adam Smith

B.

Almost all economists

C.

An antiglobalization protester

D.

A mercantilist

Assume that Norway and the United States agree to trade. Further assume that the only factor of production is labor and that it is perfectly mobile between timber and​ steel, but not between countries. Technology is fixed. For quantitative​ answers, enter a number only​ (no

​units).

7. In what product should Norway​ specialize?

A.

None of the above.

B.

Norway should produce both steel and timber.

C.

Norway should produce 14 timber.

D.

Norway should produce 7 steel.

8. In what product should the United States​ specialize?

A.

The U.S. should produce both steel and timber.

B.

None of the above.

C.

The U.S. should produce 8 steel.

D.

The U.S. should produce 32 timber.

9. What is the lowest acceptable price for​ steel?  

nothing  

Highest acceptable price for​ steel?  nothing10. What is the lowest acceptable price for​ timber?   

nothing  

Highest acceptable price for​ timber?  nothing

Prior to​ trade, the US produced 3.5 units of steel and 18 units of timber. Norway produced 2 units of steel and 10 units of timber. Negotiate an exchange price and set up a specific trade beneficial to both parties. Specify how much each should​ produce, the trade​ price, how much each will​ trade, and what is their final consumption bundle.  

11. In this two country​ world, what have been the gains from trade in​ steel?

nothing  

In​ timber?  nothing

12. Suppose an important technological discovery allows Norway to produce 1.5 times as much timber with the same resources they currently use. The U.S. does not have access to this patented technology. Which of the following​ changes?

A.

​Norway's comparative advantage

B.

​Norway's absolute advantage

C.

The prices at which Norway would agree to trade

D.

Nothing would actually change following this new technology in this specific example

Create a graph which clearly shows the​ following, all well​ labeled, all prior to the advance in​Norway's technology.  You can find a graph template in the Documents tab. Use colored pencils or markers and make your graph as CLEAR AS​ POSSIBLE! Sloppy graphs are hard to accurately grade. Scan or take a picture of your graph and email it to​ [email protected] before 10 pm and within your test time limit. Include on your graph all of the​ following:

                                               ​a) the PPF for Norway

                                               ​b) the PPF for the United States

                                               ​c) the before trade production point for Norway

                                               ​d) the before trade production point for the United States

                                               ​e) the specialization point for Norway

                                               ​f) the specialization point for the United States

                                               ​g) the trade line for Norway

                                               ​h) the trade line for the United States

                                               ​i) the new consumption point for Norway

                                               ​j) the new consumption point for the United States

Click to select your answer(s).

Answer 1

1) United States produce more steel than Norway and therefore United States has absolute advantage in Steel.

Therefore (C) United States is the answer to this question.

2) United States produce more timber than Norway and therefore United States has absolute advantage in Timber

Therefore (A) United States is the answer

3) Opportunity Cost of 1 unit of steel for Norway = 14/7 = 2 units of Timber

Opportunity Cost of 1 unit of steel for United States = 32/8 = 4 units of Timber

Since Opportunity Cost of steel for Norway is less, it has comparitive advantage in Steel

Therefore (C) Norway is the answer to this question

4) Opportunity cost of 1 unit of timber for Norway= 7/14 = 1/2 unit of steel

Opportunity Cost of one unit of timber for US = 8/32 = 1/4 unit of steel

Since Opportunity cost of Timber for United States is less, it has comparitive advantage in Timber.

Therefore (c) United States is the answer to this question