Question

tountmies Uni+ laibor requirennents. SUPPY F Ooor tours Oranges (8) 3hrs Pears (LB) 1,2D0 Home 4 hrs Faceign ohrs Inr OPeortynity cost oranges (Le) 0.75 Pears(Le) Home Fore iga s(lo Construct tne world relathive SUPy Curve (es), Mare sure SUPPY 4ou label all The points in the Curve Changes, show in tne grapn and uwincre tat grapn for wnicn reiative Paces of Pears (PelPo) and quanhties, Producton cnanges fo earn Prease camercte araen

Answer 1

Consider the given problem here there two goods “Pears” and “Oranges”. So, here the home country has lower opportunity cost in the production of “pears” compare to the foreign country. Similarly, foreign country has lower opportunity cost in the production of “oranges” compare to the home country.

P Pp/Po 6 RS A3 A4 A1 4/3 A2 300/100 3 C Pears/Oranges

If the world relative price “p=Pp/Po” is less than “4/3” then both the country will specialize to the production of “Oranges”, => the production of “pears” is “0”, => the relative supply of pears is “0”, => for “p < 4/3” the “world relative supply” is “OA1”. Now, if the “p=4/3”, => the relative price is exactly equal to the opportunity cost, => home country can produce any point on its PPF but the foreign country will specialized to oranges only, => here the “RS” is horizontal until home country total specialize to “pears”. If home country totally specialized then will be able to produce “1200/4 = 300 units of pears”. Similarly, if foreign country totally specialized in orange then will be able to produce “600/6 = 100 units of oranges”. So, the RS is horizontal for “p=4/3” until “300/100 =3units” of pears/oranges. SO, for “p=4/3” the relative supply is “A1A2”.

Now, for “4/3 < p < 6” home country totally specialized in pears and foreign country totally specialized in oranges, => the RS is vertical at “3 of pears/oranges”, => RS is given by “A2A3”. Similarly, for “p=6” home country totally specialized in pears but foreign country can produce any point on its PPF, => the RS is horizontal, => the RS is given by “A3A4”. So, the above fig shows the RS of “pears” for different possible relative price of “pears”.