Problem $1$: This question applies the basic David Ricardian model of two countries and two

goods. The table below contains the unit labor requirements in Foreign country and Home

country for each of two goods.

Home country has $200$ units of labor, while Foreign country has $300$ units of labor.

Use this information to answer questions that follows.

Labor Needed per Unit of Output

Foreign Home

Cheese $6$ unites of labor per pound $2$ unites of labor per pound

Whiskey $5$ unites of labor per gallon $4$ unites of labor per gallon

Q$1\mathrm{.}1$: Which country is more efficient in producing both cheese and whiskey and why?

Q$1\mathrm{.}2$: Please draw the production possibility frontiers $($PPF$)$ for both countries $($Suppose y$-$axis is

the output level of cheese, x$-$axis is the output level of whiskey$).$

Q$1\mathrm{.}3$: What are the opportunity costs? Please fill out the table below.

Opportunity Cost

Cheese Whiskey

Foreign $()$ gallons of Whiskey $()$ pounds of Cheese

Home $()$ gallons of Whiskey $()$ pounds of Cheese

Q$1\mathrm{.}4$: Which country has a comparative advantage in producing cheese and why?

Q$1\mathrm{.}5$: Which country has a comparative advantage in producing whiskey and why?

Q$1\mathrm{.}6$: Assuming that the per unit labor price is $$1.$ Please write down the price ratios between

whiskey and cheese for Home country and Foreign country, respectively. What can you

conclude?

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Your conclusion$($s$)$:

Q$1\mathrm{.}7$: A new trade deal is announced! The Home country and Foreign country now want to trade

both cheese and whiskey amongst each other.

Based on your results from questions $(1\mathrm{.}4)$ and $(1\mathrm{.}5),$ which country should specialize in cheese?

Which country should specialize in whiskey?

Q$1\mathrm{.}8$: Using this example to explain in detail the Ricardian theory of comparative advantage.

Q$1\mathrm{.}9$ Bonus Question: Assuming that Home country and Foreign country each want to produce

an equal amount of cheese and whiskey. If they do this $($that is$,$ no trade or specialization$),$ how

many pounds of cheese and gallons of whiskey can be produced in the Home country? How

many pounds of cheese and gallons of whiskey can be produced in the Foreign country? $($Please

show your work.$)$

Problem $2$: Country A$$s demand and supply curves are shown below. Please answer the

following questions.

Q$2\mathrm{.}1$: Is Country A an importing country or exporting country? Why?

Q$2\mathrm{.}2$: Please derive and draw the corresponding excess demand or excess supply curve in the

right panel.

Q$2\mathrm{.}3$ Please mark the line with $$ES$$ or $$ED$.$

Problem $3$: Suppose Australia can export applesauce and import wine. The production

possibility frontier of producing two products is concave and labeled as PPF$.$ IC represents

the indifference curves for Australia. Using the graph below, please answer the following

questions:

Q$3\mathrm{.}1$: Autarky Equilibrium point is $()$

Q$3\mathrm{.}2$: Free Trade Production point is $()$

Q$3\mathrm{.}3$: Free Trade consumption point is $()$

Q$3\mathrm{.}4$: Please draw the trade triangle in the graph, and please label $$applesauce exports$$ and

$$wine imports.$$