Consider Home and Foreign in a Ricardian world (includes all the assumptions of the Ricardian model). Each country produces two goods, wine and cotton. Each country has 4,800 labor hours available. The accompanying table shows the number of hours required to produce one unit of each good in each country. Answer the following questions using the information given in the table:

	Wine	Cotton
Home	6	8
Foreign	5	4

a. What is the opportunity cost of cotton in each country? Show your work. Draw the graph of the production possibility frontier (PPF).

b. Which country has an absolute advantage in Wine? Explain your answer. Which country has a comparative advantage in Wine? Show your work and explain your answer. Which good does each country produce and export when the equilibrium international relative price of wine in terms of cotton is 1?

c. Suppose the equilibrium international relative price of wine in terms of cotton is 1. Draw the graph of the production possibility frontier (PPF) for each country when they trade. Show how the two countries can benefit from free trade. Explain your answer and fully label your graph to get marks.

d. Draw the world relative supply (RS) of wine. Fully label your graph to get marks (Do not draw the world relative demand (RD) of wine yet).

e. Now, suppose that the world relative demand is drawn such that the equilibrium international relative price of wine is at 1. Draw the world relative demand curve of wine on the diagram above (in part g). Explain which country (countries) benefit(s) (most) from free trade in this case.

f. Now, suppose that the world relative demand is drawn such that the equilibrium international relative price of wine is at 1.25 (=5/4). Draw the world relative demand curve of wine on the diagram above (in part g). Explain which country (countries) benefit(s) (most) from free trade in this case. Calculate the Home country’s relative productivity of labour in each sector.

j. Suppose that the price of wine is $10 per bottle and the price of cotton is $10 per bushel. Calculate the relative wage in Home (the wage of Home relative to the wage in Foreign). Show your work and explain your answer.

h. Show the relative wage in Home lies in between the relative productivity of labour of two sectors using the information you obtained from parts j and k. Wine C

  

Transcribed Image Text:

a. Home: Opportunity cost (cotton) = Number of hours of cotton/Number of hours of wine Opportunity cost (cotton) = 8/6 Opportunity cost (cotton) = 4/3 Foreign: Opportunity cost (cotton) = Number of hours of cotton/Number of hours of wine Opportunity cost (cotton) = 4/5 The graphs of PPF as per the above is: The PPF is the same as CPF: Qc 600 PPF 800 Home CPF Qw Qc 1,200 PPF 960 Foreign CPF Qw a. Home: Opportunity cost (cotton) = Number of hours of cotton/Number of hours of wine Opportunity cost (cotton) = 8/6 Opportunity cost (cotton) = 4/3 Foreign: Opportunity cost (cotton) = Number of hours of cotton/Number of hours of wine Opportunity cost (cotton) = 4/5 The graphs of PPF as per the above is: The PPF is the same as CPF: Qc 600 PPF 800 Home CPF Qw Qc 1,200 PPF 960 Foreign CPF Qw

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Answer Let Home and Foreign be denoted by H and F respectively And Wine and Coffee be denoted by W and C respectively Let the quantity of cotton and w... View the full answer