Question: Consider trade between two countries that have the following unit labor requirements for the production of cheese and wine as well as endowment of labor

Consider trade between two countries that have the following unit labor requirements for the production of cheese and wine as well as endowment of labor (L): Home Foreign ac= 20 ac = 16 aw = 5 aw = 2 L = 800 L = 160 a) Which country has an absolute advantage in cheese and which in wine? Which country has a comparative advantage in cheese and which in wine? What are the relative prices of cheese (Pc/Pw) at Home and in Foreign assuming they are in autarky (closed economies)? b) If consumer preferences are given by U( Xc , Xw ) = X xw . find the equation for the relative demand curve (xc/xw). Use this to find the free trade price if both countries engage in free trade. Would both countries gain from trade

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