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Case: Consider a Ricardian model. There are two countries called Australia and New Zealand and two goods called beer and cheese. In Australia the unit labour requirement for a beer is 1 hour and for a cheese is 2 hours. In New Zealand the unit labour requirement for a beer is 4 hours and for a cheese is 1 hour. Australia has an endowment of 100 hours of labour. New Zealand has an endowment of 100 hours of labour.
the budget constraint line is x+y=100
the PPF of Australia is 2x+y=100
the PPF of New Zealand is x+4y=100
Question 1: While the ratio of prices is apparent from Question 3, we will assume from here on that the price of beer is $2 and the price of cheese is $1. If 50 cheeses are consumed in New Zealand, how many beers will be consumed in New Zealand? Now if 20 cheeses are consumed, what will be the change in the consumption of beer?
Question 2: For both countries calculate the hourly wage rate (with international trade.
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