Home produces two goods, computers and wheat, for which capital is specific to computers, land is specific to wheat, and labor is mobile between the two industries.
Home has 100 workers and 100 units of capital but only 10 units of land.
a. Draw a graph similar to Figure 3-1 with the output of wheat on the vertical axis and the labor in wheat on the horizontal axis. What is the relationship between the output of wheat and the marginal product of labor in the wheat industry as more labor is used?
b. Draw the production possibilities frontier for Home with wheat on the horizontal axis and computers on the vertical axis.
c. Explain how the price of wheat relative to computers is determined in the absence of trade.
d. Reproduce Figure 3-4 with the amount of labor used in wheat measuring from left to right along the horizontal axis and the amount of labor used in computers moving in the reverse direction.
e. Assume that due to international trade, the price of wheat rises. Analyze the effect of the increase in the price of wheat on the allocation of labor between the two sectors.