1. Home has 1,200 units of labor available. It can produce two goods, apples and grapes.

The Unit labor requirement in apple production is 3, while in grapes production it is 2. a. Graph
Home’s production possibility frontier.

Grapes 600

1.5

400 Apple
b. What is the opportunity cost of apples in terms of grapes? An apple in terms of bananas is
3/2 = 1.5 bananas. Opportunity cost= 1.5
c. In the absence of trade, what would be the price of apples in terms of grapes? Why?
P(a)P(b)=1.5 in the absence of trade. The relative price is equal to the slope of PPF.

2. Suppose in an hour, 10 kg of rice and 5 meter of cloth is produced in India, and 5 kg and
2 meter in Thailand. Using opportunity costs, explain which country should export Cloth and
which should export rice.

Producing rice’s opportunity cost in India is (5/10) = 0.5.

Producing cloth’s opportunity cost in India is (10/5) = 2.
Producing rice’s opportunity cost in Thailand is (2/5) = 0.4.
Producing cloth’s opportunity cost in Thailand is (5/2) = 2.5
Therefore, producing rice has less opportunity cost in Thailand than India, whereas, producing
cloth has less opportunity cost in India. Hence, India will produce and export cloth as the
opportunity cost of production of cloth is less in India than in Thailand. If India produces rice,
then the country will sacrifice a great deal on the opportunity cost of rice. Similarly, following the
views given by Costinot and Vogel (2015), it can be stated that Thailand will produce and export
rice. It will ensure the country losing less as producing cloth in the country will cost extra in the
terms of opportunity cost of producing cloth

3. “It has been all downhill for the West since China entered the world market, we just can’t
Compete with hundreds of millions of people willing to work for almost nothing.” Discuss.
 This statement fails to connect wages and productivity. Though, wages in China are
undoubtedly lower than they are in the United States, the reason for this is that productivity is
significantly lower in most industries in China. The diagram in the box titled “Do Wages Reflect
Productivity?” shows that Chinese productivity is less than 10% that of the
UnitedStates,corresponding to much lower wages in China. Thus, even though wages are
higher in the United Statesthan they are in China, it is not clear that it is cheaper to produce all
goods inChina. Given higher productivity, some goods may still be cheaper to produce in the
United States, despite higher wages

4. Why do government set the living standards of the people by setting the minimum
wages?