Economic

Assume two countries, Home and Foreign, with the same technology of production to produce tiles and autos. According to this technology, the production of one auto requires 5 units of labour and 2 units of capital, and the production of tiles requires 10 units of labour and 5 units of capital. Home is endowed with 15,000 units of labour and 20,000 units of capital. Foreign endowments are 10,000 units of labour and 10,000 units of capital.

c) Assume that in Foreign the price of tiles in autarky is 20 m.u., and the price of autos in autarky is 9 m.u. Determine the prices of the factors of production in autarky in Foreign.

d) Assume now that with trade between the two countries, the price of tiles is 19.5 m.u. and the price of autos is 9.5 m.u. Calculate the new prices of the factors of production in the equilibrium with trade. Represent graphically and compare the equilibrium prices of factors in autarky with those with trade and explain the changes using the corresponding theorem/effect