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1. (20 points) Suppose China and India are considering whether to engage in trade. Here are the production possibilities of the two countries before trade occurs: Table 1. Production of Wheat or...

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1. (20 points) Suppose China and India are considering whether to engage in trade. Here are the production possibilities of the two countries before trade occurs:
Table 1. Production of Wheat or Cotton in China and India.
The Opportunity Costs of producing one product or the other are displayed.
             1000’s of         XXXXXXXXXXTons of
            Wheat Bushels XXXXXXXXXXCotton
    Nation          Produced XXXXXXXXXXor     Produced
    China XXXXXXXXXX100     XXXXXXXXXXor     XXXXXXXXXX
    India XXXXXXXXXX30         or     XXXXXXXXXX
a)    Which nation has the comparative advantage in producing Wheat? Which nation has the comparative advantage in producing Cotton? Explain how you a
ived at these conclusions.
)    Explain the Law of Comparative Advantage, and its application to trading relationships between any two nations. In the example above, if the two nations decide to engage in mutually beneficial trade, which nation should specialize in producing Wheat and which nation should specialize in producing Cotton, based on the Law of Comparative Advantage. Why?
c)    Suppose a trade proposal is made to exchange 1 thousand Bushels of Wheat for 1.2 tons of Cotton. Would these terms-of-trade (1 Wheat : 1.20 Cotton ) be acceptable to, and mutually beneficial for both China and India as trading partners? Why or why not?
d)    What are the “payoffs” from open trade? What are some of the limitations associated with open trade?
2. (10 points) Suppose Japan and Taiwan are trading, and cu
encies must be exchanged as goods/services are imported and exported between the two nations. The new Taiwan Dollar (TWD) is the cu
ency of Taiwan, and the Yen (¥) is the cu
ency of Japan.
Are the following statements co
ect or inco
ect? Why or why not?
a)    “If Japan is importing an increasing amount of goods from Taiwan, these imports (produced in Taiwan and shipped to Japan) create an increased demand for new TWD’s in the Cu
ency Exchange Market for TWD’s.”
)    “If Taiwan is importing an increasing amount of goods produced in Japan, these imports (produced in Japan and shipped to Taiwan) create an increased supply of Yen (¥) in the Cu
ency Exchange Market for Yen (¥).”
c)    “If Japan is exporting an increasing amount of its goods to Taiwan, the rise in exports from Japan to Taiwan creates an increased supply of new TWD’s in the Cu
ency Exchange Market for TWD’s.”
3. (10 points) You are asked to analyze the Short Run Production Function for a firm. Please answer the following questions with complete explanations.
a)    Explain the logical relationships that exist between Total Product (Q), Marginal Product (MP = ΔQ/ΔL) and Average Product (AP=Q/L) in the short run. What resource condition determines that the Short Run Production Function is appropriate for investigating input-to-output relationships for a firm?
)    What are the three stages of production in the short run? Which stages are not considered to be economically rational, and why? Which stage is considered rational, and why? In your answer, it is necessary to identify the boundary points that identify the borderlines between the three stages of production.
4. (10 points) Finally, you asked to analyze the Long Run Production Function for a firm. Please answer the following questions with complete explanations.
a)    What condition determines that we should use the Long Run Production Function for investigating input-to-output relationships for a firm?
)    What are three possible scenarios for “returns to scale” in long run production? How do the average productivity patterns in each phase of these returns-to-scale scenarios influence the long run average total cost of production as the firm’s output increases? Why?
c)    In long run production, using isoquant-isocost analysis, what marginal condition must be true concerning the MPL per $ of Labor Cost and the MPK per $ of Capital Cost along the optimal expansion path for production? When this marginal condition is met, what is true about the total cost of production? Why would this result be of interest to a rational production manager?
If needed, use graphs as needed (all axes and functions completely labeled) to accompany your written analyses.
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Answered 8 days After Mar 18, 2022

Solution

Sandeep answered on Mar 26 2022
106 Votes
5
ECONOMICS ASSIGNMENT
Ans 1
Table 1. Production of Wheat or Cotton in China and India.
    Nation
    1000’s of Wheat Bushels Produced
    vs
    Tons of Cotton Produced
    China
    100
    O
    70
    India
    30
    O
    60
a) China’s Opportunity Cost of 100 Bushel Wheat = China’s Opportunity Cost of 70Tons of Cotton
Divide both side by 100,
China’s Opportunity Cost of 1 Bushel Wheat = Opportunity Cost of 7/10 tons of Cotton                        
India’s Opportunity cost of 30 Bushel Wheat is = India’s Opportunity Cost of 60Tons of Cotton
If India’s produces 1 Bushel Wheat, divide both side by 30
India’s Opportunity Cost of 1 Bushel Wheat is = Opportunity Cost of 2 tons of Cotton
Therefore China’s relative cost of producing 1 bushel wheat is = 7/10 tons of Cotton which is cheaper than India’s cost of forgoing/giving up being 2 tons of cotton.
Hence China has Comparative Advantage in producing Wheat.
China’s Opportunity Cost of 70T of Cotton = Opportunity Cost of 100 bushel Wheat
Dividing both side by 70
China’s Opportunity cost of producing 1 T of Cotton is = 10/7 bushel wheat for China
India’s Opportunity Cost of 60T of Cotton is = Opportunity Cost of 30 Bushel Wheat
Dividing both side by 60
China’s Opportunity cost of producing 1 T of Cotton is = 1/2 bushel wheat for India
Therefore India’s relative cost of producing 1 ton of Cotton is = 1/2 bushel wheat which is Lower than China’s cost of forgoing/giving up being 10/7 bushel wheat.
Hence India has Comparative Advantage in producing Cotton.
Ans1 b)
Law of Comparative Advantage
In this age of Open trade and Globalization in which any country is free to trade with any other country basis on economics of mutually beneficial to each other economy it makes sense for countries to engage in producing only those goods in which it enjoys relative advantage over other country either due to climate factors, endowed with abundance of natural resources like all factors of production, skilled workforce, technical skills etc. The Law of Comparative advantage is defined as theory or situation in which an individual , entity or Country is able to produce some goods or render services at much lower opportunity cost than another individual, Business or Country .
This theory has many application in business world, managing country’s finite resources most efficiently and productively, ensuring favourable/ beneficial terms of trade between 2 countries. Thus this theory establishes the most beneficial rule of trade by allowing nation to focus on producing and exporting those goods in which it has comparative advantage over other nation and simultaneously trading for other goods/services it doesn’t enjoy same advantage in, both nations have capacity to mutually benefit from such exchange of goods/services.
For E.g.: Gulf nations enjoy oil producing monopoly in the world and supply to world since it is in abundance there whereas other nation import it from them. Similarly India due to availability of technically skilled workforce and favourable time zone is the call centre of world and knowledge based centre, rendering these services cheaper than elsewhere in the world
If the China and India are to engage in mutually beneficial trading relationship based on the laws of Comparative advantage then the situation would be as below:
India will be producing Cotton and exporting it to other countries of the world, as it has economies of scale and comparative advantage in it.
Therefore India will produce and export Cotton. They must get at least between ½ Bushel wheat and 10/7 bushel wheat for each ton of cotton. (1/2 bushel wheat < 1 TC < 10/7 bushel wheat). On the other hand China should give up less than 10/7 Bushel wheat for each ton of Cotton.
Similarly China will produce and export Wheat. They must get at least 7/10ton of Cotton for each ton of Bushel wheat. (7/10T < 1Bushel Wheat < 2T). India should give up less than 2 ton of Cotton for each ton of bushel Wheat.
Ans 1 c)    
India’s Opportunity Cost of 1.2 ton of Cotton is = 1 Bushel wheat of India forgone
Dividing both side by 1.2
India’s Opportunity cost of producing 1 tons of Cotton is = 1/1.2 bushel wheat for India.
Hence India’s opportunity cost of producing the 1 ton of Cotton means forgoing 1/1.2 bushel wheat
China’s Opportunity Cost of 1 Bushel Wheat is = 1.2 ton of Cotton forgone
China’s Opportunity cost of producing 1 bushel wheat is = 1.2 ton of Cotton.
Hence China opportunity cost of producing the 1 bushel wheat means forgoing 1.2 ton of Cotton
Yes the new Terms of Trade will be agreeable and mutually beneficial to both countries since,
India’s having comparative advantage in Cotton as long its Opportunity cost of 1bushel wheat does not exceed the max 10/7 bushel wheat it’s in India’s trade benefit to keep producing it.
On the other hand it’s in China’s terms of trade interest to keep producing and exporting Wheat as long as it cost of forgoing Cotton does not exceed 2 ton of Cotton.
Ans 1...
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