Reference no: EM132473308
Consider two countries, Violet (Home) and Pink (Foreign), which can produce apples and lemonade. There is only one factor of production (labor). In order to produce a gallon of lemonade, Violet workers need 5 hours, while Pink workers need 10 hours. In an hour, Violet workers can produce 6 pounds of apples, while Pink workers can produce only 2 pounds of apples. Markets are perfectly competitive. Violet's labor endowment is
L = 60,000 hours, while Pink's labor endowment is L*= 90,000 hours.
a) What are the unit labor requirements for each product (apples and lemonade) in each country?
b) What is the opportunity cost of a gallon of lemonade in terms of pounds of apples in Violet? And in Pink?
c) What country has a comparative advantage in which good and why?
d) Draw the production possibility frontiers for Violet and Pink, with lemonade on the horizontal axis. What is the slope in Violet? And in Pink?
e) Draw the world relative supply, with the relative price of lemonade in terms of apples on the vertical axis, and the relative supply curve on the horizontal axis
f) Draw a world relative demand curve, crossing the relative supply curve at a point such that the relative price of lemonade in terms of apples is 20 pounds of apples for one gallon of lemonade. What good (or goods) will Violet produce at this price? What good (or goods) will Pink produce at this price?
g) Draw the consumption possibility frontiers for Violet and Pink (in two separate graphs) when there is international trade and the relative price of lemonade is 20 pounds of apples (as in the question above). Are there gains from trade for Violet? Why or why not? And for Pink? Why or why not?
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