Question

Please solve the following problems:

1.Home has 1,200 units of labor available. It can produce two goods, apples and bananas. The unit labor requirement in apple production is 3, while in banana production it is 2.There is now also another country, Foreign, with a labor force of 800. Foreign’s unit labor requirement in apple production is 5, while in banana production it is 1.Construct the world relative supply curve in terms of bananas.

2.Suppose that instead of 1,200 units of labor, Home has 2,400. How does this change the previous results? What if Home becomes half as productive (6 for apples and 4 for bananas)?

3.Japanese labor productivity is roughly the same as that of the United States in the manufacturing sector (higher in some industries, lower in others), while the United States is still considerably more productive in the service sector. But most services are not traded. Some analysts have argued that this poses a problem for the United States, because our comparative advantage lies in things we cannot sell on world markets. What is wrong with this argument?

Answer 1

a. The world relative supply curve is constructed by determining the supply of apples relative to the supply of bananas at each relative price. The lowest relative price at which apples are harvested is 3 apples per 2 bananas. The relative supply curve is flat at this price. The maximum number of apples supplied at the price of 3/2 is 400 supplied by Home while, at this price, Foreign harvests 800 bananas and no apples, giving a maximum relative supply at this price of 1/2. This relative supply holds for any price between 3/2 and 5. At the price of 5, both countries would harvest apples. The relative supply curve is again flat at 5. Thus, the relative supply curve is step shaped, flat at the price 3/2 from the relative supply of 0 to 1/2, vertical at the relative quantity 1/2 rising from 3/2 to 5, and then flat again from 1/2 to infinity.

The figure is attached-