Question

7. Assume that Home and Foreign produce two goods, TVs and cars, and use the information below to answer the following questions: In the No-Trade Equilibrium Home Foreign Wagerv = 12 Wagec = ? Wageiv=? Wagec = 6 MPLT=4 MPL = ? MPLiv=? MPL = 1 Prv=? Pc=4 Piv=8 P = ? a. What is the marginal product of labor for TVs and cars in Home? What is the no- trade relative price of TVs in Home? b. What is the marginal product of labor for TVs and cars in Foreign? What is the no- trade relative price of TVs in Foreign? c. Suppose the world relative price of TVs in the trade equilibrium is PTv/Pc = 1. Which good will each country export? Briefly explain why. d. In the trade equilibrium, what is the real wage in Home in terms of cars and in terms of TVs? How do these values compare with the real wage in terms of either good in + no-trade equilibrium?

Answer 1

Givens Assume that Home and foreign produce two goods, Tusand cars, and we the information below to to answca the following questiory. a) what is the marginal product of labour for tus. and cars in Home ? Heou- a) The home country "marginal product of labor" in 'TV" Seltoe is "4" => Labor nequioment in this sector is "Yu" => wage must be equal to "pt" MpL: =) 4 xpt = la => pt = 3 Now the price of car is "Pc=4" => The relative price of "TV" is given by "/" Now the autarkic situation the relative price must be the autarkic Price of "TV" => pte = 3/4 = (4) / Impre) amplelu

=) MpLc /M = 3/4 => MPLE =3 (marginal Product of labour) labour for car in "Home" 2. The marginal Product of 'is given by "S" as the autarkic quilibrium Price is given by "B/" b) what and cay product is in of the marginal foreign ? labour for Tus Heous - Now for the foreign country the rage and MPL are given in the question. =>"pxc" be the price of con =) (p¢*) * (mp4*) = WW => p* = 6 So the orclative price of Tv in foreign country is Given by = "8/6= 4/3 now undea the autarlic situation the relative price must be equal to the opportunity cost.

2) Pt* *.413 = Compre") C meet => mpLC"/mpLt* = 43 =) V * mpit up =) mplet = 3/4 . So the wage in TV sector is given by (P2*) * (mpit) = 8H (3/4)=6 =s ut. (0) Suppose the would relative price of TVs in the trade equilibrium is Paul Pe=1. Heceli - So we got that the autarlaic equilibrium price in the "Home" and "forcign" county are "3%," and "43". rgpecting Now if both country trade to each other and the price. =) İY q which is betan aurlarlic equilibrium Price. -s "Home" county will expect TV" in exchange or "loons" Sinee. .: P: 1394* Similary "foreign country will expect "Cons" in exchange of "pl" . Since o=1243

d) In the trade equilibrium , what is the dual wage in Home in terny of coy and in terms of Tus? There So under the trade the wage in torty of "TV" is given by "wt [pt = mplt: un -) Real wage in torory of car is given by wt }pt = mp2c*(P) -3* New onder "no trade " Situation the abore expression are gien by "wt/pt=mplet EU and wt|pt - mplex (D) - 3x (3/u) alu terny of "to" of "can" ander ou wain trade vi so ue can real wage in same but it incoruas in tormy compare trade situation. = =