Solution-Both countries open up to free trade

Both countries open up to free trade

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Reference no: EM13306620

1. Home (no asterisk) and Foreign (asterisk) produce cheese and wine with the following unit

Labor requirements:

Home Foreign

Cheese alc = 5 alc* = 6

Wine alw = 2 alw* = 6

Home and Foreign have total labor forces of L=100 and L*=200 workers

(a) Both countries open up to free trade. Graph the relative world supply of cheese to wine and its response to the relative world price of cheese Pc/Pw based on the unit labor requirements. Provide specific values on the axes.

(b) World consumer demand for cheese relative to wine depends on the relative price of the two goods: (Qc + Qc*)/(Qw + Qw*) = 6 – 5(Pc/Pw). Graph the relative demand curve. Calculate the relative price Pc/Pw of cheese in world trade equilibrium. Calculate theproduction of Qc, Qc*, Qw and Qw*. Calculate the equilibrium wage rates w and w* under free trade. Be explicit about your assumptionsregarding demand (e.g. Leontief preferences).

Reference no: EM13306620

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Both countries open up to free trade

Reference no: EM13306620

Reference no: EM13306620

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