Exercise 2 Two countries, A and B prodused two goods 1 and 2 ting a single production factor, labor. Both countries are endowed with the following amounts of labor: Lx = 180 hours La = 720 hours The unit labor costs are 14 - 10; 4x - 30 - 40; 228 - 20. Dis is the production of good i in country, and y, is the national income of country i measured in terms of good 1, which is cacsen as the numeraire. p is the price of good 2 in terms of good 1. Consumers in both countries have the same preferences and the demand func tions are d = 0.5y and do=0.5(/P) 2.1 State the characteristics of cach country in antarky 2.2 What is the comparative advantage of each country? If both countries open to trade, what is the free trade equilibrium price? 2.3 At this equilibrium price, how much do both countries produce, consume and trade? Assess the gains from trade and determine if countries do have the interest to trade. 2.4 After a short war between both nations, country A annexed a province from country B. Consequently, relative population sites changed. The number of available bours for country B decreases by 20 available hours, while it in creases by 20 for country A. These hours are now part of endowment of country A. These new workers in A have the same productivities than the rest of workers in A. Assess the gains from trade and determine if countries do have the interest to trade under the new conditions Exercise 2 Two countries, A and B prodused two goods 1 and 2 ting a single production factor, labor. Both countries are endowed with the following amounts of labor: Lx = 180 hours La = 720 hours The unit labor costs are 14 - 10; 4x - 30 - 40; 228 - 20. Dis is the production of good i in country, and y, is the national income of country i measured in terms of good 1, which is cacsen as the numeraire. p is the price of good 2 in terms of good 1. Consumers in both countries have the same preferences and the demand func tions are d = 0.5y and do=0.5(/P) 2.1 State the characteristics of cach country in antarky 2.2 What is the comparative advantage of each country? If both countries open to trade, what is the free trade equilibrium price? 2.3 At this equilibrium price, how much do both countries produce, consume and trade? Assess the gains from trade and determine if countries do have the interest to trade. 2.4 After a short war between both nations, country A annexed a province from country B. Consequently, relative population sites changed. The number of available bours for country B decreases by 20 available hours, while it in creases by 20 for country A. These hours are now part of endowment of country A. These new workers in A have the same productivities than the rest of workers in A. Assess the gains from trade and determine if countries do have the interest to trade under the new conditions