GE273.U5.

ProblemSet1-Instructor

UNIT 5 PROBLEM SET 1 ANSWER KEY

Problem 2.4, page 60: Award up to 100 points.
a) Canada has the comparative advantage in making boots. Canadas opportunity cost of
making one boot is giving up one shirt. In the United States, the opportunity cost of making
one boot is giving up three shirts. The United States has the comparative advantage in
making shirts. In the United States, the opportunity cost of making one shirt is giving up onethird of a boot, but Canadas opportunity cost of making one shirt is one boot.
b) Neither country has an absolute advantage in making both goods. The United States has the
absolute advantage in shirts, but Canada has the absolute advantage in boots. Both
countries have the same amount of resources. If each country puts all its resources into
shirts, then the U.S. makes 12 shirts, but Canada makes only 6 shirts. If each country puts all
its resources into boots, then Canada makes 6 boots, but the United States makes only 4
boots.
c) If both countries specialize in the good in which they have a comparative advantage and then
trade with the other, they can both be better off. Lets use the case in which each trades half
of what it makes for half of what the other makes. The United States will specialize by making
12 shirts and Canada will specialize by making 6 boots. Since each gets half of the others
production, they both end up with 6 shirts and 3 boots. This means they are better off than
before trading, because they end up with the same amount of boots, but twice as many shirts.
Other trades will also make them better off.

Problem 4.14, page 269: Award up to 100 points.

Without Quota

With Quota

World price per pound of kumquats

$0.75

$0.75

Price to U.S. consumers

$0.75

$1.00

Quantity supplied by U.S. producers

4 million

6 million

Quantity demanded by U.S. consumers

13 million

12 million

9 million

6 million

Quantity imported

The quota forces U.S. consumers to pay a higher price and cut back on consumption. U.S.
producers are better off as a result of the quota because they can sell kumquats for a higher price
and also sell more units.

Problem 5.3, page 270: Award up to 100 points.

Protectionism is the use of trade barriers to shield domestic companies and their workers from
foreign competition. The beneficiaries are the protected domestic companies and their workers.
The losers are domestic consumers and other domestic producers who cannot buy their inputs as
cheaply.
The main arguments for protectionism are that it 1) saves jobs, 2) protects high wages, 3) allows
infant industries a chance to get started and grow, and 4) protects national security. Students
should explain whether or not they believe these arguments justify protectionist policies.