12. The question below applies the basic Ricardian model of one factor(labor) an
ID: 1166265 • Letter: 1
Question
12. The question below applies the basic Ricardian model of one factor(labor) and two goods to the
national economy of Home. Assume the following:
aLF = number of labor hours needed to produce a unit of Food in Home;
aLC = number of labor hours needed to produce a unit of cloth in Home;
PF = the price per ton of Food;
PC = the price per yard of Cloth.
a. Under what conditions workers in Home will all want to work in the cloth sector?
b. What is the opportunity cost of Cloth?
c. In the absence of international trade, under what condition Home will have to produce
both Food and Cloth for itself?
Explanation / Answer
Given the factor endowments and the abour units needed to produce both goods,
A.The home will work in cloth if both absolute and comparative advantage of producing cloth is more than that of food.
B. the oppotunity cost of producing cloth is the number of units of food it forgoes to produce one more unit of cloth. If the country has comparatice advanatge in food, then the opportunity cost is higher.
C. In the absence of international trade, Home should concentrate more on producing the good for which it has an absolute advantage(good that can be produced with lesser units of labour, say cloth here). In the short run the country has to bear the opportunity cost of producing food. In the long run, the country should work on producing cloth to maximise production efficiency and profits. Once a break even level is rached, Home can subtitute cloth with food.But both in short run and long run, home has to bear some amount of opportunity costs if it aims to produce both food and cloth.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.