This question is about the Ricardian model with increasing returns. There are two countries

in this model, Colombia (Home) and Italy (Foreign). There are two goods in this model, coffee

beans and espresso machines. Both countries are identical in terms of production technology

and population.

Coffee bean production exhibits constant returns to scale,

ac = a c = 1/900

Espresso machine manufacturing exhibits increasing returns to scale.

In particular, unit labor productivity depends on the quantity of labor employed.

ae = h(Le) = 1/L2 e

Finally, the population of each country is given by,

Lcol = Lita = 100

a)Suppose both countries are initially in autarky, and that labor is allocated so that the unit labor requirement is the same in both sectors. How much labor is allocated to each sector and how much of each good is produced? (Remember the countries are identical)

a)Now suppose that these countries open to trade, and espresso machine production is concentrated in Colombia. In particular, the free trade level of qecol, is equal to the sum of autarky production of espresso machines in the two countries. The remaining labor is allocated to coffee production.