Consider a world composed of two countries, Home (H) and Foreign (F). Individuals living in each country. i = H, F have preferences over two goods x and y. In each country there is only one factor of production, labour, which is perfectly mobile between industries but immobile between countries. The total labour endowment at Home is ĪH = 10 and the total labour endowment in Foreign is LF = 10. The marginal product of labour in each industry is constant. At Home, one worker can produce 2 units of good x or 1 unit of good y per unit of time; at Foreign one worker can produce 1 unit of good x or 2 units of good y per unit of time. Assume that consumers in Home and Foreign always consume goods x and y in the same quantity regardless of their prices. That is, Cri = Cyi, i = H, F. (a) Calculate the opportunity cost of producing one additional unit of good a in terms of units of good y in Home and Foreign. (b) Derive the production possibilities frontier (PPF) for Home and Foreign and plot it in a graph with good a in the horizontal axis and good y in the vertical axis. (c) Determine the equilibrium price of good x (setting the price of good y as 1) that prevails at Home and Foreign under autarky that is, when they do not trade with each other. Explain why any other price could not be the equilibrium price in autarky. (d) Determine the optimal consumption and production at Home and Foreign under autarky Depict this situation
Consider a world composed of two countries, Home (H) and Foreign (F). Individuals living in each country. i = H, F have preferences over two goods x and y. In each country there is only one factor of production, labour, which is perfectly mobile between industries but immobile between countries. The total labour endowment at Home is ĪH = 10 and the total labour endowment in Foreign is LF = 10. The marginal product of labour in each industry is constant. At Home, one worker can produce 2 units of good x or 1 unit of good y per unit of time; at Foreign one worker can produce 1 unit of good x or 2 units of good y per unit of time. Assume that consumers in Home and Foreign always consume goods x and y in the same quantity regardless of their prices. That is, Cri = Cyi, i = H, F. (a) Calculate the opportunity cost of producing one additional unit of good a in terms of units of good y in Home and Foreign. (b) Derive the production possibilities frontier (PPF) for Home and Foreign and plot it in a graph with good a in the horizontal axis and good y in the vertical axis. (c) Determine the equilibrium price of good x (setting the price of good y as 1) that prevails at Home and Foreign under autarky that is, when they do not trade with each other. Explain why any other price could not be the equilibrium price in autarky. (d) Determine the optimal consumption and production at Home and Foreign under autarky Depict this situation
Chapter13: General Equilibrium And Welfare
Section: Chapter Questions
Problem 13.6P
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