There are two countries Home and Foreign. They can produce two goods, apples and bananas. Home...

There are two countries Home and Foreign. They can produce two goods, apples and bananas. Home has 1,200 units of labor available and Foreign has a labor force of 800. The table below contains the unit labor requirement in Foreign and Home for each of two goods.

	Banana	Apples
Home	aB = 1 hour per pound	aA = 2 hours per pound
Foreign	aB = 4 hours per pound	aA = 5 hours per pound

1. Suppose that, after opening to trade, the equilibrium world relative price of bananas is 0.7. Graph how each country’s consumption possibilities change, with bananas on the horizontal axis. Label the axes and curves and give the slope of each curve.

2. Describe the pattern of trade.

3. Suppose the world price of bananas is $7 and of apples is $10. Find the hourly wages in Home and Foreign. What is the relative wage? (Notice that Home is 4 times more productive in cheese and 2.5 times more productive in wine, so Home’s relative wage will fall somewhere between 2.5 and 4.)

4. Show that both Home and Foreign gain from trade.

Solutions

Expert Solution

Rahul Sunny answered 1 year ago

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