Two countries, Home and Foreign, use one factor, labor, to produce two

goods, coats and shoes, C and S. The labor requirements in the Home coun-

try are: 1 hours of labor to produce one coat, 1 hours to produce a pair of

shoes. The labor requirements in the Foreign country are: 8 hours of labor

for coats and 2 hours for shoes. The labor supply are L = 100 hours at

home and L = 200 hours in the Foreign country. Preferences are identical

in the two countries.

1. Which country has an absolute advantage in producing coats? Which

country has a comparative advantage in producing coats?

2. Imagine the two countries are allowed to trade. Draw the world relative

supply curve (in terms of S=C).

3. For which price range will both countries specialize. What is the world

production of coats and shoes when PS

PC

is in that range? What hap-

pens if PS

PC

is not in this range?