True/False: For each question, answer T/F and briefly explain the answer.
Long, long ago, there are two countries: Shire and Gondor. Suppose that Shire is endowed
with 600 hours of labor and 300 acres of land. Gondor is endowed with 300 hours of labor
and 300 acres of land. At current factor prices in the Shire, one yard of cloth is produced
using 20 hours of labor and 5 acres of land, and one ton of food is produced using only 5
hours of labor and 10 acres of land. Both countries have the same production technology.
Question 1-5: Both countries are in autarky.
1. The Shire is relatively land abundant. (Hint: you need to calculate the ratio of endowments for
both countries and to compare them)
2. The production of cloth is labor intensive (Hint: you need to calculate the ratio of the factors
needed in producing each good and compare them)
3. The wage is relatively higher in Gondor.
4. The price of cloth relative to food is higher in the Shire than in Gondor.
5. The Shire produces more cloth relative to food than Gondor
Question 6-11: Both countries open up their borders to international free trade.
6. The relative price of food decreases in Gondor.
7. The production of cloth expands in the Shire.
8. Land becomes more expensive in the cloth industry in Gondor.
9. Both countries gain from trade.
10. In both countries, landowners benefit from international trade.
11. Workers in Gondor are better off.
Short Answer 1: Suppose 2 economies, France and Holland, produce fresh-cut flowers, tulips
and roses, using land and labor. Tulips are land intensive, and France is more abundant in
(1) Under Holland France free trade, which country exports tulips, and which country
exports roses? What happens to the relative price of roses in France and Holland? Explain your
answers verbally or graphically.
(2) Illustrate that France gains from trade using picture with the PPF.
(3) In Holland, will workers support the Holland- France free trade? What about landowners? Why
or why not? Plus, are the workers' and landowners' attitudes towards free trade affected by which
industry they work for? Explain your answers verbally.
Short Answer 2: Following are the data for soybean yield, production and trade for 2004
Production (100,000 Exports(100,000
Suppose that the countries listed in the table above are engaged in free trade and that soybean
production is land intensive. Answer the following:
(1) What countries to have comparative advantage in soybean production?
(2) In which countries do land owners benefit from free trade in soybeans? Explain.
(3) In which countries do land owners lose from free trade in soybeans? Explain.
(4) In which countries does the move to free trade in soybeans have little or no effect on the
price of land or rental rate? Explain
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1. The Shire is relatively land abundant. (Hint: you need to calculate the ratio of endowments for both countries and to compare them)
If we see in comparison of the ratio of endowments of both the countries the Shire is more depend on the land abundant. But in Gondor are not focused on the land abundant.
2. The production of cloth is labor intensive. (Hint: you need to calculate the ratio of the factors needed in producing each good and compare them)
If we see the labor as the production factor used largely by Shire and Gondor, like shire used for cloth production 20 hours of labor and 5 acres of land and at same time the Gondor also used more labor for production of cloths....