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Free response question

Macroeconomics · Hard · 30 marks

IEO past paper: 2026 International Economics Olympiad, open questions

Open Question 3. Designed here, assembled there A finished chip requires one design blueprint (D) and one manufactured component (C): chips = min(D, C). Each worker performs one activity, and may divide working time between activities. Per period: - an engineer produces 2 blueprints or 1 component; - a machinist produces 1 blueprint or 3 components. There are two countries in the world: Northia and Fabrica. Northia has 60 engineers and 20 machinists. Fabrica has 20 engineers and 60 machinists. Countries consume only finished chips, assembled domestically.

(a)Each country lives in autarky. Find the maximum number of chips each country can produce. Explain why the opportunity cost of blueprints in terms of components is increasing in each country, even though every individual worker has constant productivity.[6](b)Blueprints and components can now be traded freely, but labor cannot migrate. Find the maximum world chip output and describe who does what. Is each country fully specialized? Explain why or why not.[7](c)Northia's parliament, worried that "we design brilliantly but have lost the ability to make things," caps component imports, forcing some engineers into manufacturing. The government announces: "The policy created new jobs." Evaluate three claims without detailed calculation: (i) the claim that employment was increased; (ii) a Fabrica newspaper's claim that Northia's quota will help Fabrica's design sector; (iii) Northia's claim that the quota is insurance: "if trade is ever cut off completely, we will be better prepared." This is not true within this model, but in reality, this argument can make sense. What real-world feature, absent from the model, makes this true?[9](d)The production function chips = min(D, C) assumes one blueprint is "used up" per chip. In the real semiconductor industry, a single design is copied onto millions of chips at almost zero extra cost, while manufacturing capacity requires enormous investment. Suppose we replaced the assumption with: one blueprint is enough for any number of components, but designing a blueprint requires 10 engineers. Without calculations, explain: (i) how the world's optimal allocation of workers between design and manufacturing would change; (ii) why, under this technology, a country specializing in design might capture a share of world income far larger than its share of world labor.[8]

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