Suppose a country has 100 westerners and 100 easterners. A ...

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Suppose a country has 100 westerners and 100 easterners. A westerner can produce either 6 units of food or 2 units of national defense; an easterner can produce either 2 units of food or 1 unit of national defense.
 
  a. Show that easterners have a comparative advantage in the production of defense.
  b. Suppose this country has decided it wants to produce 60 units of defense. Would the country have more food to consume if the westerners produced these 60 units of defense or if the easterners produced this defense?
  c. Why should you have anticipated your answer to part (b) of this question?
  d. Now suppose this country institutes a draft and chooses people for the military randomly. Suppose further that it drafts 20 westerners and 20 easterners (who together will produce 60 units of defense). How much food will the country produce if it chooses to have a military draft?
  e. Compare the cost in terms of foregone food production under a draft to the cost under a volunteer army where the country pays the easterners enough to persuade them to become soldiers.

Question 2

What determined the exchange rates among currencies under the gold standard, and what caused the gold standard to collapse?
 
  What will be an ideal response?

[anoriega3]

Answer to Question 1

a. If a westerner joins the army then defense production rises by 2, food falls by 6, and so the opportunity cost of 1 unit of defense is 3 units of food. If an easterner joins the army then defense production rises by 1, food production falls by 2, and so the opportunity cost of 1 unit of defense is 2 units of food. Therefore easterners have a comparative advantage in defense since they have a lower opportunity cost.
b. If the westerners produce defense then this country would need 60/2 = 30 westerners in defense, leaving 100  30 = 70 westerners and all 100 easterners to produce food. This country would produce (70 x 6) + (100 x 2) = 620 units of food in this case. If the easterners produce defense then this country would need 60/1 = 60 easterners in defense, leaving 100  60 = 40 easterners and all 100 westerners to produce food. This country would produce (40 x 2) + (100 x 6) = 680 units in this case. So this country would produce more food if the easterners produce defense.
c. You should have anticipated this result because you showed in (a) that the easterners have a comparative advantage in the production of defense.
d. If the country uses 20 westerners and 20 easterners to produce defense then 80 westerners and 80 easterners will be available to produce food. In this case, food production will be (80 x 6) + (80 x 2) = 640 units of food.
e. You showed in (b) that the country would produce 680 units of food if the easterners produce defense and you showed in (d) that the country would produce 640 units of food with a draft. Therefore, the cost of defense measured in terms of foregone food production is higher with a draft than with an all-volunteer army.

Answer to Question 2

Under the gold standard, the exchange rate between two currencies was automatically determined by the quantity of gold in each currency. The gold standard collapsed during the Great Depression because countries wanted to fight the Depression with expansionary monetary policy, but under the gold standard the central banks lacked control of the money supply.

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[momolu]

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