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| | == '''Congratulations on completing Economics! Comments on Final Exam Here:''' == | | == '''Congratulations on completing Economics! Comments on Final Exam Here:''' == |
| | + | From a student: |
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| | + | I have thought through this question again and here is what I came up with. Mr. Schlafly successfully persuaded me to assume that the demand for rackets is equal to that for shoes. In fact, I believe that that assumed equality works against his answer rather than for it. |
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| | + | 37. If China spends 3 units to produce a tennis racket but 5 units to produce a pair of tennis shoes, and the United States spends 9 units to produce a tennis racket but 10 units to produce a pair of tennis shoes, then how should China allocate its production (assuming “free trade”)? |
| | + | <br>(a) China should produce half tennis rackets and half tennis shoes. (Winning answer if you assume equal demand for both goods and further assume that China chooses to completely satisfy demand) |
| | + | <br>(b) China should produce only tennis rackets. (Losing answer) |
| | + | <br>(e) Can’t tell. (Winning answer otherwise) |
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| | + | Argument: |
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| | + | In order for China to only make tennis rackets it must buy shoes from America. Thus, instead of making one racket and one pair of shoes for a total of 8 units, China can make 3 rackets and sell two of them to the US for a pair of shoes and 8 units: thereby saving themselves 7 units! This brings us to a particular bit of wisdom that I think is rather poetic: If it sounds too good to be true, it probably is. The flaw in China’s racket-only money-making scheme is that they can’t continue to make only rackets forever. No matter what the demand for rackets, it cannot be infinite (Lets say hypothetically that each country has demand for 1000 of each good). Therefore, China will only be able to sell a limited number of rackets to the US; when they have sold all 1000 rackets to the US, they will have only gained 500 shoes and will be forced to produce their own. QED. |
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| | + | Other complications: |
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| | + | This question involves an interesting though unrealistic mix of a monopoly and a monopsony: While China is the only country that can afford to produce tennis rackets, it also has only one country to whom they can sell. One might argue (as I did above) that China will sell 2 rackets to the US for one pair of shoes and 7 units (which saves America 1 unit and China 6), yet one also might argue that the price would be 2 rackets for one pair of shoes and 2 units (which saves America 6 and China 1). You can only really tell that the number of units given to China in addition to the pair of shoes will be > 1 and < 9. |
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| | + | The quick, easy, common-sense, solution: |
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| | + | Why would America ever produce a pair of shoes for 10 units when they can buy one from China for somewhere in between 5 and 10? |
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| | + | Why China will produce all the tennis rackets and all the shoes: |
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| | + | In the situation above involving in which China sells two rackets to the US for a pair of shoes and between 1 and 9 units, the combined units that the two countries save is 7 units per two rackets and pair of shoes. Alternately, if China produces two rackets and a shoe and then sells rackets to the US (for between 3 and 9 each) the combined units that the two counties save for each two rackets and pair of shoes is 12. |
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| | == Final Exam == | | == Final Exam == |