Consider a Ricardian model. There are two countries calledAustraliaandNew Zealandand two goods called beer and cheese. InAustraliathe unit labour requirement for a beer is 6 hours and for a cheese is 12 hours. InNew Zealandthe unit labour requirement for a beer is 4 hours and for a cheese is 1 hour.Australiahas an endowment of 3600 hours of labour.New Zealandhas an endowment of 400 hours of labour.

1. Draw a production possibility frontier (PPF) diagram forAustraliaand a PPF diagram forNew Zealand(separate diagrams please). Cheese must be on the vertical axis and beer must be on the horizontal axis. (2 marks)
2. For both countries state the opportunity cost of producing a beer. (2 marks)
3. Suppose now that we have trade between the countries and the world price is 1 cheese for 1 beer. For each country draw in the budget constraint. For each country label the production point on the diagram. (5 marks)
4. Denote the world prices in dollars asPBandPCrespectively. Denote the respective quantities of beer and cheese consumed inNew Zealand(following,trade, of course) asDBandDC. Using this notation, write out the budget constraint forNew Zealand. Rearrange this budget constraint so that it is clear that the ratio of these world prices is reflected by the slope of the budget constraint. [DCshould be on the left hand side and the rest of the stuff should be on the right hand side.]