1. Home has 1,200 units of labor available. It can produce two goods, apples and bananas. The unit labor requirement in apple production is 3, while in banana production it is 2. a. Graph Home’s production possibility frontier. b. What is the opportunity cost of apples in terms of bananas? c. In the absence of trade, what would the price of apples in terms of bananas be? Why?
1. Home has 1,200 units of labor available. It can produce two goods, apples and bananas.
The unit labor requirement in apple production is 3, while in banana production it is 2.
a. Graph Home’s production possibility frontier.
b. What is the
c. In the absence of trade, what would the
Why?
2. Home is as described in problem 1. There is now also another country, Foreign, with a
labor force of 800. Foreign’s unit labor requirement in apple production is 5, while in
banana production it is 1.
a. Graph Foreign’s production possibility frontier.
b. Construct the world relative supply curve.
3. Now suppose world relative
for bananas = price of bananas/price of apples.
a. Graph the relative demand curve along with the relative supply curve.
b. What is the
c. Describe the pattern of trade.
d. Show that both Home and Foreign gain from trade.
4. Suppose that instead of 1,200 workers, Home has 2,400. Find the equilibrium relative
price. What can you say about the efficiency of world production and the division of
the
5. Suppose that Home has 2,400 workers, but they are only half as productive in both
industries as we have been assuming. Construct the world relative supply curve and
determine the equilibrium relative price. How do the gains from trade compare with
those in the case described in problem 4?
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