Reference no: EM13998351
Consider the Ricardian model. Home has 1200 unites of labor available. It can produce two goods, apples (A) and bananas (B). The unit labor requirement in apple production is 3, while in banana production it is 2.
Introduce Foreign, with a labor force of 800. Foreign's unit labor requirement in apple production is 5, while in banana production is 1.
(a) construct the world relative supply curve, with the relative price of bananas Pb/Pa on the y-axis
(b) Suppose both Home and Foreign workers have preferences represented by the utility function U(Da, Db) = Da^(1/3) * Db^(2/3). Graph the RD curve along with the RS curve. What is the world equilibrium relative price of bananas to apples?
(c) Describe the patterns of trade (include numbers). Do both Home and Foreign gain from trade? Explain.
(d) Now suppose both countries have Leontief preferences (i.e., goods are perfect complements), so that world relative demand takes the following form: Qb/Qa = 1. Repeat parts (b) and (c) with this RD curve.
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