What is the opportunity cost of a purse in terms of wallets

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Assignment:

Home has 1200 units of labor in its economy. It can produce only two goods, purses (P) and wallets (W). 6 workers at Home can produce a purse or two wallets.

(a) Graph Home's PPF with W on the vertical axis.

(b) What is the opportunity cost of a purse in terms of wallets?

(c) Assume that Home is closed to trade. Furthermore, assume Home consumers' will derive no utility if only one good is produced. What would the price of purses in terms of wallets be? How do we know for certain that this is price in the no-trade equilibrium?

(d) Now assume there exists another economy, Foreign. Foreign has a work force of 1600. As it turns out, Foreign's economy also only produces wallets and purses. 8 workers at Foreign can produce four purses or a wallet. Graph For- eign's PPF with W on the vertical axis.

(e) Given this information for Home and Foreign, describe the pattern of trade. What can you say about the relative price of wallets in the free trade? Demon- strate graphically the gains from trade for Home and Foreign.

Reference no: EM133255827

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