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Midterm Assessment ECON203-1920 Term 2
ANSWER KEY
Deadline: 11 March 2020 11.59pm
Late submissions will not be accepted. All submissions will be made through eLearn. By
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not be accepted.
Consider a Ricardian world with two countries, Wizville and Gadgetland, that produce two
goods, phones and computers. To produce one computer, Wizville needs 10 labor-hours,
while Gadgetland needs 8 labor-hours. To produce one phone, Wizville needs 4 labor-hours
while Gadgetland needs 2 labor-hours. In the free trade equilibrium, the world relative price
of computers in terms of phones is 4.
Q1: What does Wizville produce?
A. Only phones
B. Only computers
C. Both phones and computers and exports both goods
D. Both phones and computers but exports one of the two goods
E. Both phones and computers but does not export any of the two goods
F. None of the two goods (they only import the two goods)
Q2: What does Gadgetland produce?
A. Only phones
B. Only computers
C. Both phones and computers and exports both goods
D. Both phones and computers but exports one of the two goods
E. Both phones and computers but does not export any of the two goods
F. None of the two goods (they only import the two goods)
Consider the 2x2x2 version of the Heckscher-Ohlin model with the standard assumptions for
production and consumer preferences. The two countries in the world, Heartland and
Coastline, produce two goods, widgets and food, using capital and labor. In the free trade
equilibrium, the optimal K/L-ratio is 2 in the widget sector and 1/2 in the food sector.
Heartland’s capital supply is 5000 and its labor supply is 6000. Coastline’s capital supply is
10,000 and its labor supply is 8000.
Q3: In the free trade equilibrium, both countries produce both goods? (True/False)
Suppose now that 10 percent of Heartland's labor force moves from Heartland to Coastline.
Capital remains unchanged. Holding all prices constant, what happens to the output of
widgets and food in each country?
Q4: In Coastline:
A. Production of widgets increases, production of food decreases.
B. Production of food increases, production of widgets decreases.
