Both F and H produce Cloth. The unit labor requirement for 1 yard of Cloth in H is 5 hours, in F is 10 hours. In H, the Labor cost is 4 times higher than in F.

(w/w*=4)

1. Which country will specialize in Cloth?

2. Now we add some information as follows. Both countries can also produce Medicine and Cloth by using labor and technology. In the short term at Home when there’s no factor substitution, it takes 5 labor hours to produce 1 yard of cloth and 8 labor hours to produce 1 tablet of medicine, 3 machine hours to produce 1 yard of cloth, and 2 machine hours to produce 1 tablet of medicine. Total Machine-hours of Home is K=1800 hours, labor-hours is L=4000 hours. Draw the Home’s PPF and prove that when we produce more medicine and less cloth, the opportunity cost of medicine rises. What does PPF look like in the long run when factor substitution is allowed?

Answer rating: 100% (QA)

Solution 1 Home country will specialized in clothes because for producing one year to clothes it are ... View the full answer