Question

In: Economics

Assume the Ricardian model where the marginal product of laborin the home country is 3...

Assume the Ricardian model where the marginal product of labor in the home country is 3 in the cheese industry and 2 in the wine industry. The home country has 10 workers. The relative price of wine (Pw/Pc) is 2 after trade. After trade the home country consumes 12 units of wine. Use this information to calculate

a. The relative price of wine before trade

b. The slope of the production possibilities frontier, where wine is on the horizontal axis and cheese on the vertical axis.

c. The good that the home country export and how much

d. Bonus. Home country's cheese consumption after trade

Expert Solution

Given

Marginal product of labor in the home country is 3 in the cheese industry.

Marginal product of labor in the home country is 2 in the wine industry.

Number of workers in the home country = 10 workers. The relative price of wine (Pw/Pc) after trade =2

After trade the home country consumes 12 units of wine.

a. We know that the Relative price before trade will be equivalent to opportunity cost of wine.

Hence we calculate Opportunity cost of wine=3/2=1.5

Therefore, relative price of wine before trade = 1.5

b. The slope of the production possibilities frontier, where wine is on the horizontal axis and cheese on the vertical axis is equal to opportunity cost of wine.

Slope of production possibilities frontier =1.5

c. Trade relative price of wine = 2

Here we have the trade relative price of wine is greater than autarky(1.5) it indicates that by exporting wine, home country will get benefited. Hence home country will export the wine.

Since home country exports wine,

==> Total production of wine=10*2=20

From the question we know that after trading home country will consume 12 wine.

Hence the export quantity of wine=20-12

=8 units.

d. We know that the relative price of wine after trade =2.

It indicates that by exporting 1 unit of wine ,home country can get 2 units of cheese.

==> We have the export quantity of wine=8 units

==> We can calculate the quantity of cheese=2*8=16 units

Hence the consumption of cheese after trade=16 units.

Rahul Sunny answered 2 years ago

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