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Answers to Textbook Problems
1. a. The production possibility curve is a straight line that intercepts the apple axis at 400 (1200/3)
b. The opportunity cost of apples in terms of bananas is 3/2. It takes 3 units of labor to harvest an
c. Labor mobility ensures a common wage in each sector and competition ensures the price of
2. a. The production possibility curve is linear, with the intercept on the apple axis equal to 160 (800/5)
and the intercept on the banana axis equal to 800 (800/1).
b. The world relative supply curve is constructed by determining the supply of apples relative to the
3. a. The relative demand curve includes the Points (1/5, 5), (1/2, 2), (1, 1), (2, 1/2).
b. The equilibrium relative price of apples is found at the intersection of the relative demand and
c. Home produces only apples, Foreign produces only bananas, and each country trades some of its
d. In the absence of trade, Home could gain 3 bananas by foregoing 2 apples, and Foreign could
4. The increase in the number of workers at Home shifts out the relative supply schedule such that the
5. This answer is identical to that in Answer 3. The amount of “effective labor” has not changed since
6. This statement is just an example of the pauper labor argument discussed in the chapter. The point is
© 2012 Pearson Education, Inc. Publishing as Addison-Wesley
Chapter 3 Labor Productivity and Comparative Advantage: The Ricardian Model 9
7. The problem with this argument is that it does not use all the information needed for determining
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Foreign labor in services. While this demonstrates that the United States has an absolute advantage in
services, this is neither a necessary nor a sufficient condition for determining comparative advantage.
8. While Japanese workers may earn the equivalent wages of U.S. workers, the purchasing power of
their income is one-third less. This implies that although w w* (more or less), p p* (since 3p p*).
Since the United States is considerably more productive in services, service prices are relatively low.
9. Gains from trade still exist in the presence of nontraded goods. The gains from trade decline as the
share of nontraded goods increases. In other words, the higher the portion of goods which do not
10. The world relative supply curve in this case consists of a step function, with as many “steps”
(horizontal portions) as there are countries with different unit labor requirement ratios. Any
countries to the left of the intersection of the relative demand and relative supply curves export
© 2012 Pearson Education, Inc. Publishing as Addison-Wesley
