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                                       Home    &n

           

                           Home      Foreign

Marginal Products

Cheese                       6           2

Wine                         4           3

Labor Force                 100         200

a. Suppose foreign’s marginal product of labor in producing wine decreases from 3 to 1 due to a disease that is affecting foreign grapes. Sketch the effect that this will have on the world supply curve for wine. Label your axes and provide numerical values.

b. Sketch the effect that the grape disease in part l will have on the foreign country’s production and consumption possibilities frontiers. It is not necessary to give numerical values but show how the curve or curves shift.

c. Assuming the values of the marginal products at the beginning of the problem, and assuming that relative price of wine is equal to one, calculate the relative wage between the two countries (w/w*).

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Answer #1

Answer Civen that 19)따 the marginal product of labour in the foreigna unby decrease FYom 3to1 this wculd mean that the Foreign country will have for lesser number of pvoduct (wine) in the Country The Foreign Country will import ui Fvom the home (ountvj The greater demand ui Furthev incrcases the numb of labor Force employed in the wine production The in Creases ajuantily owil incrcoses the marginal output ofuire and this ω¡ll also Lead to an increase in the ne ice of wine in the market (e) on comparing the com parative cest lopp adumitr cost oF Praducing both the pvodu me and Foreign- t here is grape dises then the oreign ui ue tess ne be cauSe of disea Ses and the produckion curve wilt shi ft ef uard in the Foreign and he price af wine edili increase by this the- mand For ine d of cheese uitl inCrea Se the cheese get cheaper then tsine as resut cheese pconwill increag becout- af demand of cheese in Comparisen with wine the home productonuue ili udilt dec reafe and the pvautionce the velatlue wage or ehe Countvies usitlb relattve wage oF the counbries will be where W woge rote of home Country Pcprice of cheese ale Price of wine the relative Price of sine iseudthentheruoggr the relative Price of wsi Of both Country wi be same or relatius cuage

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