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Both the U

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Both the U.S. and Mexico only need labor to produce computers and beer. Suppose that workers in the U.S. need 5 hours to assemble a computer and 2 hours to produce one case of beer, while workers in Mexico need 10 hours to assemble a computer and 1 hour to produce one case of beer. The U.S. has 10 million labor hours available to use in production each month. Mexico also has 10 million labor hours available for production per month. For simplicity, assume that opportunity costs are constant for both countries.

1. Plot the Production Possibilities Frontier (PPF) of the U.S. and Mexico for computers and beers. Place computers in the horizontal axis for both countries. Make sure you mark clearly the x-intercept and y-intercept for each PPF in your graphs. Be consistent using units of account. What is the opportunity cost of producing one computer for the U.S.? And for Mexico? What is the opportunity cost of producing one case of beer for the U.S.? And for Mexico?

2. Suppose both the US and Mexico allocate half their available hours of work to the production of computers and half to the production of beer. If both countries are self-sufficient (i.e. there is no trade), how many computers and cases of beer will the US be able to consume? How many computers and cases of beer will Mexico be able to consume? Make your calculations explicit and mark this point clearly in each country’s PPF. Explain briefly in words.

3. Which country has the absolute advantage in producing computers? Which country has the absolute advantage in producing beers? Explain your answer in words and with numbers.

4. Which country has the comparative advantage in producing computers? Which country has the comparative advantage in producing beers? What product(s) should the US specialize in? What product(s) should Mexico specialize in? Explain your answer in words and with numbers.

5. Now suppose that Mexico comes up with a better technology for producing computers, so that if Mexico allocates all its labor hours to computers, it can now produce 5 million computers. Will this have an impact on Mexico’s PPF? If so, show us graphically and explain briefly. Make sure to mark clearly what the x-intercept and y-intercept of the PPF are. Will this new technology affect Mexico’s comparative advantage? Will it affect the U.S. comparative advantage? Explain in words and with numbers.