Jordan German University, Amman, Jordan

MBA 748 – International Business

Assignment no.2
Farah Hasan Magableh
18th May 2020
CHAPTER FIVE QUESTIONS
1. Home has 1,200 units of labor available. It can produce two goods, apples and bananas. The unit labor
requirement in apple production is 3, while in banana production it is 2.
a. Graph Home’s production possibility frontier.

L=1200/ ala=3/ alb=2

Maximum quantities of produced apples = L/ ala = 1200/3 = 400
Maximum quantities of produced bananas = L/ alb = 1200/2 = 600

Home's PPF
450
400
350
300
Q(Apples)

250
200
150
100
50
0
0 100 200 300 400 500 600 700
Q(Bananas)

b. What is the opportunity cost/price of apples in terms of bananas?

Opportunity cost is the slope of the line = ala/ alb = 3/2 = 1.5

c. In the absence of trade, what wpuld the proce of apples in terms of bananas be, why?

Home will give up 1.5 bananas to produce one more apple, because it takes 3 hours to produce one
apple while 2 hours to produce 1 banana, so to produce one more apple, by giving up 1 more banana
we have two extra hours to produce apples, 1 apple needs 3 hours so home will produce 1.5 apples
in 2 hours (as long as wages are equal in both industries and Price =Cost in both industries).
2. Home is described in Problem 1. There is another country, Foreign, with a labor force of 800. Foreign’s
unit labor requirement in apple production is 5, while in banana production it is 1.
a. Graph Foreign’s production possibility frontier.

L*=800/ ala*=5/ alb*=1

Maximum quantities of produced apples = L*/ ala* = 800/5 = 160
Maximum quantities of produced bananas = L*/ alb* = 800/1 = 800

Foreign's PPF
180
160
140
120
Q*(Apples)

100
80
60
40
20
0
0 100 200 300 400 500 600 700 800 900
Q*(Bananas)

b. Construct the the world relative supply curve.

ala/ alb = 3/2 = 1.5
ala*/ alb *= 5/1= 5
(L/ ala)/(L*/ alb*)= (1200/3)/(800/1) = ½
Opp. cost in Home for Apples is 3/2=1.5 and for Bananas is 2/3 = 0.667
Opp. cost in Foreign for Apples is 5/1 =5 and for Bananas is 1/5= 0.2
Home has a comparative advantage in Apples’ production while Foreign has a comparative advantage in
Bananas’ production.

world relative supply curve

6.00

5.00

4.00
Relative Price

3.00

2.00

1.00

0.00
0.00 0.20 0.40 0.60 0.80 1.00 1.20
Relative Quantity
3.Now suppose world relative demand takes the following form: Demand for apples/demand for bananas
= price of bananas/price of apples.
a. Graph the relative demand along with relative supply curve.

Relative Price World Relative demand & Relative Supply curve

6.00

5.00

4.00

3.00

2.00

1.00

0.00 Relative Quantity

0.00 0.20 0.40 0.60 0.80 1.00 1.20

b. What is the equilibrium relative price of apples?

Pc/Pf at the equilibrium = $2 where the RD intersects with RS.

c. Describe the pattern of trade.

Home specializes in Apple production while Foreign specialized in Banana production; and the
exchange rate is 2 for 1; Home offers 2 apples for 1 banana.

d. Show that both Home and foreign gain from trade.

As shown In charts below, Home and foreign countries can consume above their PPF (more than
both can do on their own) , they both can trade 2 bananas for 1 apple; while before trade, home can
gain 2 bananas by forgoing 3 apples and foreign can gain 1 apple by foregoing 5 bananas, Each
country is better off by trade cause they have less opportunity cost of production.
Q(Apples)

Q(Apples)

Foreign PPF Before and After Trade

Home PPF Before and After Trade
180
450
160
400
140
350
300 120
After Trade After Trade
250 100
Before Trade Before Trade
200 80
150 60
100 40
50 20
0 Q(Bananas) 0 Q(Bananas)
0 100 200 300 400 500 600 700 0 100 200 300 400 500 600 700 800 900
4. Suppose that instead of 1,200 workers, Home had 2,400. Find the equilibrium relative price. What can
you say about the efficiency of world production and the division of the gains from trade between
Home and Foreign in this case?
ala/ alb = 3/2 = 1.5
ala*/ alb *= 5/1= 5
(L/ ala)/(L*/ alb*)= (2400/3)/(800/1) = 1

Relative Price World Delative Demand & Relative Supply

6.00 curve

5.00

4.00

3.00

2.00

1.00

0.00 Relative Quantity

0.00 0.50 1.00 1.50 2.00 2.50

The equilibrium price will be 1.5, Home will not get benefit (doesn’t lose or gain) as the price equals the
opportunity cost, while Foreign country will still benefit from trade.

5. Suppose that Home has 2,400 workers, but they are only half as productive in both industries as we have
been assuming. Construct the world relative supply curve and determine the equilibrium relative price.
How do the gains from trade compare with those in the case described in problem 4?
ala = 6 / alb= 4
ala/ alb = 6/4 = 1.5
ala*/ alb *= 5/1= 5
(L/ ala)/(L*/ alb*)= (2400/6)/(800/1) = 1
The answer will be similar to problem 3 answer, the productivity has decreased to the half and number
of workers has double so (L/ ala) will be the same.

6. "Chinese workers earn only $.50 an hour; if we allow China to export as much as it likes, our workers
will be forced down to the same level. You can't import a $10 shirt without importing the $.50 wage
that goes with it." Discuss.
Wages in China are determined according to the price of the good they produce and the unit labor
requirement (ws*=Ps*/als*), so according to the numbers, Labor in china has lower wages than home
and lower productivity als* =Ps*/w*= 10/0.5=20.
While in Home, labor have higher productivity and higher wages as well. The relative wages are
determined by relative demand for goods and comparative productivity so home workers < who work
in our comparative advantage industry> won’t experience wages reduction and will experience higher
purchasing power (as imported goods will be cheaper in Home after trade).
7.Japanese labor productivity is roughly the same as that of the United States in the manufacturing sector
(higher in some industries, lower in others), while the United States is still considerably more
productive in the service sector. But most services are nontraded. Some analysts have argued that this
poses a problem for the United States, because our comparative advantage lies in things we cannot sell
on world markets. What is wrong with this argument?
The problem with this argument is that it assumes that US has a comparative advantage in services
without having enough information to do so. Comparative advantage depends on both the relative wages
and relative productivity in the services and manufacturing industries. If als in the US is lower than als in
Japan, that definitely means that Us labor is more efficient and productive in the service industry, this
means that the US has an absolute advantage in services industry but NOT NECESSARILY a comparative
advantage (as we have to compare the productivity and wages for both countries in both industries).

8. Anyone who has visited Japan knows it is an incredibly expensive place; although Japanese workers
earn about the same as their U.S. counterparts, the purchasing power of their incomes is about one-
third less. Extend your discussion from question 7 to explain this observation. (Hint: Think about wages
and the implied prices of nontraded goods.)
Wages in Japan are almost equal to wages in the US, but their purchase power is one third less, that might
be because to the following:
US is more productive in services which are nontraded (prices won’t go up due to trade), so US workers
will be benefit from having relatively cheap services prices. While in Japan, workers cannot benefit from
lower US services prices (because they are not tradable) and will experience higher domestic prices which
consequently lowers their purchasing power.

CHAPTER FOUR QUESTIONS

1. In 1986, the price of oil on world markets dropped sharply. Since the United States is an oil-importing
country, this was widely regarded as good for the U.S. economy. Yet in Texas and Louisiana, 1986 was a
year of economic decline. Why?
Texas and Louisiana are the major leading oil producing states; when the relative price of exported oil
went down, the demand of domestic oil reduced thus the land/capital owners and workers had been hurt
(Qd ↓, P ↓ , Cost of production (per unit) ↑, w ↓). Now labor of oil industry moved to other industries
(higher wages) and some capital had also been moved to other industries (bulldozers … etc). This
mobilization of resources did not happen immediately and costless.

Labor Input to Good 1 Output of Good 1 Labor Input to Good 2 Output of Good 2
0 0 0 0
10 25.1 10 39.8
20 38.1 20 52.5
30 48.6 30 61.8
40 57.7 40 69.3
50 66 50 75.8
60 73.6 60 81.5
70 80.7 70 86.7
80 87.4 80 91.4
90 93.9 90 95.9
100 100 100 100
2.An economy can produce good 1 using labor and capital and good 2 using labor and land_ The total
supply of labor is 100 units. Given the supply of capital, the outputs of the two goods depend on labor
input as follows:
 a. Graph the production functions for good 1 and good 2.
b.
Good1 Production Function b. Good2 Production Function

Output
Output

b.
120 120
b.
100 100
b.
80 80
b.
60
b. 60
40
b. 40
20 b. 20
0
0 20 40 60 80 100 120 b. 0 0 20 40 60 80 100 120
Labor input b. Labor input
b.
Graph the production possibility frontier, why is it curved?
It’s curved because it reflects the maximum amount of two goods a country can produce , The law of
increasing opportunity cost states; as the production of one good rises, the opportunity cost of producing that
good increases.
Production Possibility Frontier
120

100

80

60
Q2

40

20

0
0 20 40 60 80 100 120
Q1

3. The marginal product of labor curves corresponding to the production functions in problem 2 are as
follows:
a. Suppose that the price of good 2 relative to that of good 1 is 2. Determine graphically the wage rate
and the allocation of labor between the two sectors.
P2/P1 = 2, assuming P2 =2 and P1 = 1
L MPL1 MPL2
10 15.1 15.9
20 11.4 10.5
30 10 8.2
40 8.7 6.9
50 7.8 6
60 7.4 5.4
70 6.9 5
80 6.6 4.6
90 6.3 4.3
100 6 4
 The equilibrium wage and allocation between two sectors is determined by the intersection of both
sectors’ demand curves, the intersection pint is approximately (30,10), which means the wages of
workers = $10/hour, Labor demanded in good 1 (L1) = 30 and Labor demanded in good 2 (L2)=70.

b. Using the graph drawn for problem 2, determine the output of each sector. Then confirm
graphically that the slope of the production possibility frontier at that point equals the relative
price.
From the schedule above, when L1 = 30; Q1 =48.6 & MPL1=10
when L2=70; Q2=86.7 & MPL2= 5
P1/P2= -0.5
Slope of PPF = MPL2/MPL1 = -5/10=-0.5

Production Possibility Frontier

120

100
(48.6,[Y VALUE])

80

60
Q2

40

20

0
0 20 40 60 80 100 120
Q1

c. Suppose that the relative price of good 2 falls to 1.3, Repeat (a) and (b).

The allocation of labor between the two sectors

25

P1MPL1 P2MPL2
20
Wages (P*MPL)

15

10

0
0 20 40 60 80 100 120
Labpr Supply
The intersection point is (50,7.8), wages will decrease to reach $7.8/h and L=50 for both industries.
When L=50, Q1=66 & Q2=75.8
-P1/P2 = -1/1.3 = -0.77
When L =50, MPL1=7.8, MPL2=6
-MPL2/MPL1=-6/7.8=-0.77
(P2 ↓, L2↓, L1=L2, w ↓)
 d. Calculate the effects of the price change from 2 to 1.3 on the income of the specific factors in sectors
1 and 2.
Price of good 2 has fallen to approximately 35%, Wages have also fallen by approximately 22%
 Effect on Labor (wages have fallen by less than the fall of price of good 2) the effect is
ambiguous depending on workers’ preferences.
 Capital owners in sector 1: P1 is fixed, wages ↓ by 22% >> they are better off.
 Land owners in sector 2: P2 ↓ by 35%, w ↓ by 22% >> they are worse off.

4. Consider two countries (Home and Foreign) that produce goods 1 (with labor and capital) and 2 (with
labor and land) according to the production functions described in problems 2 and 3. Initially, both
countries have the same supply of labor (100 units each),Capital, and land. The capital stock in Home
then grows. This change shifts out both the production curve for good 1 as a function of labor
employed (described in problem 2) and the associated marginal product of labor curve (described in
problem 4). Nothing happens to the production and marginal product curves for good 2.
a. Show how the increase in the supply of capital for Home affects its production possibility frontier.
b. On the same graph. draw the relative supply curve for both the Home and Foreign economy
c. If those two economies open up to trade. what will be the pattern of trade(i.e which country
exports Which good?)
d. Describe how opening up to trade affects all three factors (labor, capital, land) in both countries.
5.In Home and Foreign there are two factors each of production, land, and labor used to produce only one
good. The land supply in each country and the technology of production are exactly the same. The
marginal product of labor in each country depends on employment as follows:
Number of workers Employed Marginal Product of Labor
1 20
2 19
3 18
4 17
5 16
6 15
7 14
8 13
9 12
10 11
11 10

Initially, there are 11 workers employed in Home, but only 3 workers in Foreign. Find the effect of free
movement of labor from Home to Foreign on employment, production. real wages, and the income of
landowners in each country.

6. Using the numerical example in problem 5, assume now that Foreign limits immigration so that only 2
workers can move there from Home. Calculate how the movement of these two workers affects the
income of five different groups:
a. Workers who were originally in Foreign
b. Foreign landowners
c. Workers who stay in Home
d. Home landowners
e. The workers who do move

7.Studies of the effects of immigration into the United States from Mexico tend to find that the big
winners are the immigrants themselves. Explain this result in terms of the example in the question
above. How might things change if the border were open, with no restrictions on immigration?