There are two countries Home and Foreign. They can produce two goods,

There are two countries Home and Foreign. They can produce two goods,

There are two countries Home and Foreign. They can produce mo goods, apples andbananas. Home has 1,2?i] units of labor available and Foreign has a labor force of BUD. Thetable below contains the unit labor requirement in Foreign and Home for each of two goods. —— App-1ea3 = 1 hour per pound by, = 2 hours per pound at; = 4 hours per pound as. = 5 hours per pound 1. Which country has an absolute advantage in bananas“? In apples? 2. Graph Homes and Foreign’s production possibility frontiers.3. Find the opportunity cost of bananas in Home and in Foreign. 4. Which country has a comparative advantage in bananas? 5. Suppose that, after opening to trade, the equilibrium world relative price of bananasis LIT. lGraph how each oountry*s consumption poaibilities change, with bananas onthe horizontal axis. Label the axes and curves and give the slope of each curve. 6. Desm’ibe the pattern of trade. 7. Suppose the world price of bananas is $2 and of apples is $10. Find the hourly wagesin Home and Foreign. What is the relative wage? {Notice that Home is 4 times moreproductive in cheese and 2.5 times more productive in wine, so Home‘s relative wagewill fall somewhere between 2.5 and 4.} E. Show that both Home and Foreign gain from trade.


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