1Second Midterm Exam, Fall 2004FACTOR PROPORTIONS MODEL1-4 Cloth production relatively intensively uses labor to land compared tofood production. The United States is abundant in land to laborcompared to Mexico. The countries have the same relative demand.1. An increase in labor in the United States causes U.S. production ofa) cloth to riseb) food to risec) cloth to falld) food to rise and production of cloth to falle) cloth to rise and production of food to fall2. An increase in land in Mexico causes Mexican production ofa) cloth to riseb) food to risec) cloth to falld) food to rise and production of cloth to falle) cloth to rise and production of food to fall3. Under free trade, Mexico exportsa) foodb) clothc) food and clothd) food and sometimes clothe) cloth and sometimes food4. Under free trade, the United States exportsa) foodb) clothc) food and clothd) food and sometimes clothe) cloth and sometimes food25-8 The United States is abundant in labor to land compared to Canada. The countries have the same technology and the same relativedemand. Each country produces both goods.5. Under free trade, the wage paid to labor in the United States isa) higher than the wage in Canadab) lower than the wage in Canadac) the same as the wage in Canadad) the same as the rent in Canada e) the same as the rent in the United States6. Under free trade, the rent paid to land in the United States isa) higher than the rent in Canadab) lower than the rent in Canadac) the same as the rent in Canadad) the same as the wage in Canada e) the same as the wage in the United States7. In the United States, who would object to free trade?a) workersb) landownersc) both workers and landownersd) neither workers nor landownerse) depends on spending patterns8. In Canada, who would object to free trade?a) workersb) landownersc) both workers and landownersd) neither workers nor landownerse) depends on spending patterns3STANDARD TRADE MODEL9-12 Free trade prevails between the United States and China (bothcountries are large). Suppose China experiences economic growthbiased toward cloth (and the United States has no economic growth).9. In world markets, the relative price of cloth to food:a) risesb) fallsc) stays the samed) rises, if China has comparative advantage in clothe) falls, if China has comparative advantage in cloth10. The terms of trade for the United States:a) improveb) deterioratec) stay the samed) improve, if China has comparative advantage in clothe) deteriorate, if China has comparative advantage in cloth11. The terms of trade for China:a) improveb) deterioratec) stay the samed) improve, if China has comparative advantage in clothe) deteriorate, if China has comparative advantage in cloth12. The change in the terms of trade for the United States generates aa) benefitb) burdenc) no changed) benefit, if China has comparative advantage in clothe) burden, if China has comparative advantage in cloth413-16 Free trade prevails between the United States and Pakistan (bothcountries are large). Suppose the United States transfers one milliondollars to Pakistan. Pakistan spends less of every dollar on food(and more on cloth) than the United States.13. In world markets, the relative price of cloth to food:a) risesb) fallsc) stays the samed) rises, if Pakistan has comparative advantage in clothe) falls, if Pakistan has comparative advantage in cloth14. The terms of trade for the United States:a) improveb) deterioratec) stay the samed) improve, if Pakistan has comparative advantage in clothe) deteriorate, if Pakistan has comparative advantage in cloth15. The terms of trade for Pakistan:a) improveb) deterioratec) stay the samed) improve, if Pakistan has comparative advantage in clothe) deteriorate, if Pakistan has comparative advantage in cloth16. The change in the terms of trade for the United States generates aa) benefitb) burdenc) no changed) benefit, if Pakistan has comparative advantage in clothe) burden, if Pakistan has comparative advantage in cloth5FACTOR PROPORTIONS MODEL PROBLEMSProducing one yard of cloth requires 2 workers and 1 acre of land, whileproducing one pound of food requires 2 workers and 5 acres of land. Bothcountries have 150 acres of land; the United States has 220 workers, whileMexico has 140. The price of food is always $60/pound; the price of clothis $28/yard in the United States in autarky and $44/yard in both countriesunder free trade.1. Determine and compare the relative abundance of factors acrosscountries. Determine and compare the relative intensity of factor useacross goods. Determine the pattern of comparative advantage andthe pattern of trade.2. Construct the land constraint (same for both countries). Constructthe U.S. labor constraint. Determine the U.S. production bundle thatfully employs both factors.3. Construct the Mexican labor constraint. Determine the Mexicanproduction bundle that fully employs both factors. Compare therelative production of cloth to food across countries. Draw graph offactor constraints, with food on the vertical axis. Indicate values forthe endpoints and for the quantities produced in each country. 4. Construct the pricing equation for food (same always for bothcountries). Construct the U.S. pricing equation for cloth in autarky. Determine U.S. factor prices in autarky that allow both goods to bepriced at cost.5. Construct the pricing equation for cloth under free trade (same forboth countries). Determine the factor prices under free trade thatallow both goods to be priced at cost. Compare the U.S. relativefactor prices (wage relative to rent) under free trade to autarky. Drawgraph of pricing equations, with rent on the vertical axis. Indicatevalues for the endpoints and for the factor prices before and aftertrade. 6. Calculate and compare the proportional changes in the wage, rent,price of cloth, and price of food. In the United States, owners ofwhich factor would oppose a free trade agreement? How can thisgroup be identified, even in autarky?6Second Midterm Exam Solutions, Fall 2004MULTIPLE CHOICE1e An increase in labor in the United States causes U.S. production ofcloth to rise and production of food to fall.2d An increase in land in Mexico causes Mexican production of food torise and production of cloth to fall.3b Under free trade, Mexico exports cloth, its comparative advantagegood.4a Under free trade, the United States exports food.5c Under free trade, the wage paid to labor in the United States is thesame as the wage in