Group Assignment #2 Answers:

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?
 
We would do what anyone would do: buy the beer in US dollars.
 
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?

 
Because there is someone in Mexico, Canada or Germany wanting to buy 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? $US 4.95

       ii.How much would it cost in Canadian currency to buy the beer in Michigan? $Canadian 3.67

      iii.Is there an arbitrage opportunity? Yes

     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? By in the US and sell in Canada. $US 2.20 or $2.93.

       v.Why might the price differential exist? There has to be something preventing arbitrage such as a quota or a tarriff.

 

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.
 
This is Ch. 17 # 4 from Gwartney. The answer is from the back of the book:
"Statements (a) and (b) are not in conflict. Because trade restrictions are typically a special-interest issue, political entrepeneurs can often gain by supporting them even when they promote economic inefficiency." [Note: I would obviously want you to answer this is your own words.]
 
       ii.Which to do you favor, free trade or protection? Explain why. This is your opinion. Any answer is correct.

      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?  This is your opinion. Any answer is correct.

     iv.More generally, what are the benefits of keeping a job in the United States? Examples: (a) The benefits to those who keep their jobs and those politicians who get their votes there are some. (b) National Defence. Some argue its important to keep certain jobs in the United States in case of war. (c) To protect an infact industry. Ect. ...

       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? This is your opinion. Any answer is correct.

 

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. Non-Calculus Production Function:

                 i.       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? 11 coconuts, 3 ladders and 3 hours of work.

                ii.       Answer (i) for if a ladder costs $20. 9 coconuts, 2 ladders and 3 hours of work.

               iii.       Explain the change in output and change in labor : capital ratio.

    Change in Output – Prices of all inputs either increase or remain the same therefore the supply curve decreases. Thus quantity decreases.

    Change in labor : capital ratio – The price of ladders relative to the price of work increases, therefore I should want to use more labor and less ladders.

     

    Calculus Production Function:

                  i.       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?

    Picking K and L to Maximize:

    TR – TC = 9 * (K*L)^.5 -10K -10L

    The answer is:

    K=L=0

    No coconuts

     

                ii.       Answer (i) for if a ladder costs $20.

    Picking K and L to Maximize:

    TR – TC = 9 * (K*L)^.5 -10K -20L

    The answer is:

    K=L=0

    No coconuts

     

               iii.       Explain the change in output and change in labor : capital ratio.

    There is no change.

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