Group Assignment #2:

Answer on a separate sheet. Only one copy is needed per group. Include the names of all group members. Be legible—I have to read it. No more than four persons can be in a group. No splitting up the assignment—you work on it together. You can be a group of one. You can hand it to me at the end of class or put it in mailbox by 3:50 PM Friday March 14th.

 

A look at Exchange Rates

(A) (1 point)

I went to the bar the other night with two friends. We each ordered a beer: a Corona, a Beck’s, and a Molson.

The bartender brought us our drinks. Then he said, “That’ll be 100 pesos, 3 marks, and 2 Canadian dollars.”

Luckily, we had it. What could we have done if we didn’t have those currencies?

The beers were produced in Mexico, Germany, and Canada. The brewers’ expenses were incurred in pesos, marks, and Canadian dollars. Their workers don’t want to be paid in a foreign currency, nor do their suppliers. How is it that we are able to buy Mexican, German, and Canadian beer with US dollars?

Helpful Hint: Do we need Mexican’s buying US goods?

 

(B) (1/4 a point for each part for a total of 1.25 points)

Labatt’s beer is produced in Canada, and sold in many countries. In the province of Ontario, a six-pack of Labatt’s beer sold for $6.60 Canadian. Across the border in Michigan, a six pack of the same beer was on sale for $2.75 U.S. At the time, the exchange rate was $0.75 U.S. = $1.00 Canadian.

         i.How much would it cost in U.S. currency to buy the beer in Ontario?

       ii.How much would it cost in Canadian currency to buy the beer in Michigan?

      iii.Is there an arbitrage opportunity?

     iv.If there is an arbitrage opportunity where would you buy and where would you sell? How much profit could you expect on a six-pack?

       v.Why might the price differential exist?

 

Tariffs and Trade Barriers

(C) (1/4 a point for each part for a total of 1.25 points)

In the case of disagreement between group members, write both (or all) answers.

         i. Can both of these statements be true? Why?

a.       Tariffs and Quotas promote economic inefficiency and reduce the real income of a nation. Economic analysis suggests that nations gain by eliminating trade restrictions.

b.      There are good reason to expect trade restrictions in the real world.

            Helpful Hint: consider special interest groups.

       ii.Which to do you favor, free trade or protection? Explain why.

      iii.Assume you are voting on a request before the U.S. International Trade Commission to raise the tariff on imports of rubber thread. Rubber thread is made from latex and is a relatively small industry. It is used in the manufacture of elastic in items like socks, underwear, and bungee cords. Increasing the tariff would allow the U.S. producers to avoid layoffs and to invest in technology. Would you vote for the tariff increase, or against it? Why?

     iv.More generally, what are the benefits of keeping a job in the United States?

       v.The costs of protectionism are paid by consumers in the form of higher prices. The obvious question is, “at what point do these costs exceed the benefits?” In your opinion, how much extra should consumers pay to keep a job in the United States? (Express this figure in dollars/per job per week.) What if it is less expensive to pay them their salaries (and let them retire) than to hold the trade barrier?

 

Production Function

(D) (1/2 a point for each part for a total of 1.5 point)

 

Choose One Production Function and answer (i) and (ii). Indicate which production function you chose.

 

Production Function 1: The Non-Calculus Production Function

 

		Units of Labor (Hours Worked)
		0	1	2	3	4	5
Units of Capital (Ladders)	0	0	0	0	0	0	0
	1	0	1	4	6	7	7
	2	0	4	7	9	10	10
	3	0	6	9	11	12	12
	4	0	7	10	12	13	13
	5	0	7	10	12	13	13

 

Production Function 2: The Calculus Production Function

 

Y = (K * L) ^ .5

 

Y = Output = Number of Coconuts

L = Hours Worked

K = Ladders Bought (or made)

1. If a coconut is worth $9, a ladder costs $10 and an hour of work costs $10, then how many coconuts should be produced? How many ladders should be bought? How many hours of work should be bought?
2. Answer (i) for if a ladder costs $20.
3. Explain the change in output and change in labor : capital ratio.