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What is the opportunity cost of cloth in foreign

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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

30

60

1) What is the opportunity cost of cloth in Foreign in terms of widgets? 

2) Which of the following statements is true? 

A Home has a comparative advantage in widgets 

B Foreign has a comparative advantage in widgets 

C Home has a comparative advantage in widgets and cloth 

D Neither country has a comparative advantage in widget

3) What is the total amount of cloth that will be produced in the free-trade equilibrium?

4) What is the total number of widgets that will be produced in the free-trade equilibrium?  

5)All else equal, if Domestic workers become twice as productive, Domestic should: 

A Sell cloth to Foreign and buy widgets from Foreign 

B Sell widgets to Foreign and buy cloth from Foreign 

C Sell cloth and widgets to Foreign 

D Buy cloth and widgets from Foreign 

E Stop trading with Foreign

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

Reference no: EM133083911

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