Which good does France have a comparative advantage in producing?
France has a comparative advantage in producing Cheese since France’s opportunity cost of producing the cheese is lower than the opportunity cost of producing the cheese in Spain.
What is the autarky price ratio in Spain?
Wage =Pc.MPLc=Pw. MPLw
Autarky price ratio of cheese=Pc/Pw = MPLw*/MPLc*=5/1=5
Autarky price ratio of wine=Pw/Pc = MPLc*/MPLw*= 1/5
Graph the PPFs for France and Spain. Be sure to indicate the slopes.
Total production of cheese in France Qcwhen all the labour available is utilized=MPLc. L=1*4=4 units of cheese
Total production of wine in France Qwwhen all the labour available is utilized =MPLw. L=2*3=6 units of wine
Total production of cheese in Spain Qc*when all the labour available is utilized =MPLc*. L*=1*5=5 units of cheese
Total production of wine in SpainQw*when all the labour available is utilized =MPLw*. L*=5*6=30 units of wine
The slope of PPF for France=- MPLw. L/ MPLc. L=-6/4
The slope of PPF for Spain=- MPLw*. L*/ MPLc*. L*=-30/5=-6
|Units of cheese produced||Units of Wine produced||Labour units required to produce Cheese||Labour units required to produce Wine||Total feasibility of cheese produced
|Total feasibility of wine produced
what is the MRS for France?
MRS=-(.6(w/c).4/.4(c/w).6)=- [(.6/.4) (w/c).4/.4(c/w).6]
MRS =-[(.6/.4) (w/c).4*.4(w/c).6]
In autarky, how much cheese does France produce?
Total production of cheese in France Qc when all the labour units are utilized =MPLc. L=1*4=4 units
In autarky, cheese produce 4/2 at the equilibrium = 2 units of cheese
In autarky, how much wine does Spain consume?
Total production of wine in Spain Qw when all the labour units are utilized =MPLw. L=5*6=30 units
In autarky, wine produce 30/2 at the equilibrium = 15 units of wine
What is Spain’s utility level in Autarky?
Cobb-Douglas utility function of Spain=C.6W.4
In Autarky c=2.5 units and w=15 units
C.6W.4= 22.214.171.124 =7.33 units
If France and Spain have free trade, how many units of cheese will France produce?
Since France has a lower opportunity cost of producing cheese than Spain, France will produce all the units of cheese when all the labour available is utilized.
Qc=MPLc=1*4 = 4 units of cheese
How many units of cheese will France consume? This will be true at any price.
France will give ½ units of cheese produced
½ *4 units= 2 units of cheese given up
Units of cheese consumed by France= Total units of cheese produced I total units of cheese given up = 4-2=2 units of cheese
What will France’s exports of cheese be? This will be true at any price.
France’s exports of cheese= Total units of cheese given up by France=½ *4 units= 2 units
How many units of cheese will Spain consume, as a function of the world price ratio P=Pc/Pw?
Since France will give up 2 units of cheese for 3 units of wine from Spain
Hence, units of cheese Spain will consume =Pc/Pw * number of units of wine Spain export= Pc/Pw *3 units= 3 Pc/Pw
At what value of P will the market for cheese clear? That is, what is the international equilibrium price?
At the international equilibrium price, the units of cheese Spain consume is equal to the units of cheese exported by France
The value of units of cheese Spain consume= 3 Pc/Pw where Pc/Pw = P =Equilibrium price
The units of cheese Spain consume = units of cheese exported by France
3 Pc/Pw = 2
International equilibrium price=2/3
What is Spain’s consumption of i) cheese and ii) wine?
Spain’s consumption of cheese= 3 pc/PW
Hence, Spain’s consumption of cheese= 3*2/3= 2 units
Spain’s consumption of wine= Spain’s production of wine- Spain’ s export of wine
Spain’s production of wine= Qw=MPLw*. L=6*5=30units
Spain’ s export of wine=3 units
Spain’s consumption of wine=30-3= 27 units of wine
What is Spain’s utility after the trade?
Cobb-Douglas utility function of Spain=C.6W.4
After trade c=2 units and w=27 units
C.6W.4= 2.627.4 =5.66 units
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