Consider a country, Home, which produces two goods, Cloth and
Food, using capital and labour with a constant-return-to-scale
technology. Food production is capital-intensive and cloth
production is labour-intensive. Capital and labour can move freely
between the two industries. Finally, let’s assume that Home’s
consumption decisions can be represented using regularly-shaped
indifference curves.
1.When Home is not engaged in international trade, use a graphic
to illustrate the consumption and production points in Home in
autarky (pre-trade situation). (2 points) 2. Assume...