Question

Home Fareign Cheese Wine Labor Force 100 200 Several questions require drawing graphs. In these cases you should graph carefully, either using graph paper à computer, or if you graph by hand, a ruler to show exact amaunts an the vertical and horizantal axes à. Whith country has an absolute advantage in producing cheese? Which country has an absolute advantage in producing wine? b. Whith country has a comparative advantage in producing cheese? Which country has a comparative advantage in producing wine? c. What is relative price of wine (P/Pe in the home country without trade? What is relative price of wine P"w/Pc) in the fareign country without trade? d. Draw the productian passibilities frantier for bath the hame country and the foreign country. Draw cheese on the vertical axis and wine on the horizontal axis. Show numerical values for the vertical and horizontal intercepts. e. Suppose the price af wine in the home country before trade is equal to 2. What is the price af cheese? What is the wage? f. Suppose that the relative price of wine after trade is equal to one. Draw the consumption passiblities frontier for bath the home country and the foreign country. Again shaw numerical values for the vertical and horizontal intercepts. Suppose that the home country consumes 240 units of cheese before trade and 240 units af cheese after trade. Cakulate the amaunt of wine the home country will consume both befare and after trade h. Calculate hame country's exports and imports (list the good it is exporting and the amount, and the good that it is imparting and the amount) i. Draw the world supply curve far wine. Label your axes and give numerical values an bath axes. j. Suppase the relative price af wine increases from 1 to 1.2S Draw the home country's new consumption possibilities frontier. What effect will this have an hame country's utility (increase, detrease ar no change)? kWhat effect will the increase in the relative price from 1 to 1.2S hae on the fareign country's utility increase, decrease or na changel? Explain L Suppase faimarginal product of labar in produting wine decreases fram 3 to 1 due to a disease that is affecting foreign grapes. Sketch the effect that this will have an the world supply curve for wine. Label your axes and provide numerical values

Answer 1

Answer:

a) Home country has Absolute advantage in cheese b/c of higher productivity Home has Absolute advantage in wine b) opp cost of cheese in Home = 0.60 wine opp cost of cheese in Foreign = 1.5 wine Thus Home has comp. Advantage in cheese & Foreign has comp Advantage in wine c) p_w/p_c = 6/4 = 1.5 implies p_w = 1.5 p_c In Foreign p_w/p_c = 2/3 implies p_w = 0.66 p_c D) f) e) If p_w = 2 p_c = p_w/1.5 = 2/1.5 = 1.33 wage = 2 times 4 = 8 = 1.33 times 6 = 8 F) If p_w/p_c = 1.25 implies p_w = 1.25 p_c