Assume that there are two countries, A and B, and two goods, X and Y. Country A
Question:
Assume that there are two countries, A and B, and two goods, X and Y. Country A has 100 units of labor and 150 units of capital, while country B has 150 units of labor and 100 units of capital. The production function for each country is given by Q = L^(1/2)K^(1/2), where Q is the output of a good, L is the quantity of labor used in production, and K is the quantity of capital used in production. The autarky price of good X is $10 in country A and $20 in country B. The autarky price of good Y is $5 in country A and $15 in country B.
a) Calculate the autarky relative price of good X for each country.
b) Determine the opportunity cost of producing one unit of good X in each country.
c) Determine the pattern of trade between the two countries if they specialize according to their comparative advantage.
d) Calculate the world relative price of good X in the case of free trade.
e) Calculate the world terms of trade.