1. Refer to the following table and assume that the total labor supply in Taiwan is 4 and the total labor supply in Vietnam is 8.
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Marginal Labor Productivities:
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Taiwan
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Vietnam
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Number of tons of rice produced per hour
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10
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5
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Number of cell phones produced per hour
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50
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10
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a. Draw each countries production possibilities curve - assuming the only two products bought and sold are rice and cell phones.
b. What is the opportunity cost of 1 ton of rice in terms of cell phones in Taiwan and Vietnam? What is the opportunity cost of 1 cell phone in terms of tons of rice in Taiwan and Vietnam?
c. Determine whether each of the following statements is true or false. Provide a brief explanation of why it is true or false.
i. Taiwan has an absolute advantage in the production of both rice and cell phones.
ii. Vietnam has a comparative advantage in the production of rice.
iii. One possible production combination for Vietnam is 40 tons of rice and 80 cell phones per hour.
d. If the two countries engage in international trade, what will Taiwan produce and why? What will Vietnam produce? Compare aggregate output for our two-nation world economy if each completely specializes with balanced output without specialization or trade.
e. What is the real wage in Taiwan? What is the real wage in Vietnam?
f. Will Taiwan and Vietnam trade if the international relative price of rice is 3? Briefly explain why or why not. What is the range of possible prices?
g. Suppose both countries begin trading freely with Myanmar, a country with a labor supply of 6 - each of which can produce 4 tons of rice or 4 cell phones per hour.
i. Draw Myanmar's PPC.
ii. What would Myanmar specialize in?
iii. How would you expect this to affect the international prices of rice and cell phones?
iv. How might trade between Taiwan and Vietnam be impacted?