Question

1. Assume that Canada and the United States both produce tea cakes and lumber, which are sold for the same price in each country. Below are the combinations of the two goods that each country can produce in one day, using the same quantities of capital and labor.

Canada		United States
Tea Cakes (in pounds)	Lumber (in tons)	Tea Cakes (in pounds)	Lumber (in tons)
0	60	0	50
10	45	10	40
20	30	20	30
30	15	30	20
40	0	40	10
		50	0

1. Define absolute and comparative advantage.
2. Will Canada and the United States benefit from trade? Please explain your answer.
3. Suppose that Canada is currently producing 30 pounds of cakes and 15 tons of lumber, and the United States is currently producing 10 pounds of cakes and 40 tons of lumber. Demonstrate that Canada and the United States can both be better off if they specialize in the production of one good and trade for the other.

2. Assume the United States can produce steel at a price of $70 per ton. The world price of steel is $55 per ton. Verbally and graphically explain why the United States is better off buying some steel from the rest of the world. (In your answer, I expect to see definitions of consumer surplus, produce surplus, societal welfare gains, and deadweight loss.)

Answer 1