Consider two countries. Japan and Laos

1. Peaches. Lanterns

Japan. 45,000. 75,000

Laos 42,000 60,000

1. Identify the absolute and comparative advantages (assuming constant marginal cost) in production for each good.
2. Assuming constant marginal cost, determine graphically the production possibilities frontier (PPF) for each country without trade. Then, determine a trade to which both countries would agree and graphically show this consumption point for both countries. Then, given the production point and the new consumption point, show what the PPF would be given the terms of the trade for both countries.

c. Assuming increasing marginal cost, determine a production possibilities frontier for each country. Pick an appropriate output for each country in autarky. Then, after picking an appropriate equilibrium price in autarky, show the effects of opening up to trade in each country. What are the effects of trade on consumption and production of each good in each country? (Note: The prices from parts a) and b) need not apply here.)

d. Does assuming increasing marginal costs create a model more or less descriptive of the real world as compared to a model assuming constant marginal costs? Why or why not?

1. Assume that lanterns are capital intensive and peaches are land intensive (both goods require both inputs). From Question 2, part b), what can you say about the relative factor endowments of Japan and Laos? What can you say about short-run versus long-run effects in terms of gains by industry and country?