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Consider a world that consists of two countries, Domestic and Foreign, in a Ricardian model setting. Suppose Domestic has L¯D = 100 workers and Foreign has L¯ F = 20 workers. The output that one worker can produce in each country in terms of each good is given in the following table:
Cloth
Widgets
Domestic
10
20
Foreign
60
30
1.6 All else equal, how would Domestic's real wages change if L¯D = 200 due to immigration? A Real wages would unambiguously rise B Real wages would unambiguously fall C Real wages would not change D The effect on real wages would be ambiguous
For 1.7 and 1.8, suppose the world price is PC PW = 1
1.7 What is Domestic's real wage in the free-trade equilibrium in terms of the good they export?
1.8 What is Foreign's real wage in the free-trade equilibrium in terms of the good they import?
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