Assignment about What Do You Mean by Economics?

Running Head: ECONOMICS 1
International Trade
Name
Institutional Affiliation
Date

ECONOMICS 2
Solution
1. (a)
Total units of labour available∈Home
labour requrement ∈apple production =1200/3 = 400 units
Home consumption has 1200 units of labor when wholly utilized produces 400 apples
Total units of labour available∈ Home
labour requrement∈banana production = 1200/2 = 600 bananas, this means that 6oo bananas
will be produce when all units of labor is utilized.
By putting Apples on vertical axis and bananas on horizontal, the line is connected to link the
two items thus opportunity cost.
Figure 1: Production Possibility Frontier

ECONOMICS 3
(b) The opportunity cost of apples in terms of bananas = Unit labour requirementof apple
labor requirement ∈banana production
= 3/2 = 1.5
Therefore, when the economy foregoes to produce apples, the amount of labor used to produce
bananas will be 1.5
(c) when international trade doesn’t exist, both goods would be produced by Home. But for
Home to produce both Apple and Bananas, the ‘relative price’ of apple in terms of bananas
should be equal to the opportunity cost.
Thus relative price of apple in terms of bananas is equivalent to the relative production labor cost
and so it is given by wage x unit labour requirement for apple
wage x unit labour requirement for bananas
= wage x 3
wage x 2
= 3/2
The reason for this is because when opportunity cost is equal to the ratio of labor units required
in apples and bananas, the relative prices for the products is the labor unit requirement. This is
because labor is considered the only factor of production.
4. The rise in number of workers from 1200 to 2400 at Home forces the ‘relative supply
schedule’ to shift. The equilibrium relative price is now 3/2. In this situation, Foreign still
benefits from trade, however, the opportunity cost for bananas in terms of apples for the Home is
similar minus considering the presence or the absence of trade and so Home does not gain and it
does not lose from trade too (Beaudreau, 2011).