Q2. (20 marks) Consider a Ricardian model with two goods, cheese C and wine W. The unit labor input requirements are: aLc = 3, aw = 2, aic = 2, aiw = 1. (An asterisk denotes a foreign variable). The supply of labor in each country is 10, that is, L = L = 10. Assume throughout that the price of wine in each country is equal to 1, that is, Pw = Pw = 1. Questions: B (4 marks) Which country has absolute advantage and which country has comparative advantage in which goods? Explain why (using inequalities). b. (5 marks) Draw and label the world relative supply curve of cheese. c. (4 marks) Find the values of Pc, P, w and w* in the autarky equilibrium (when the two counties do not trade with each other), where w and w* are wages in the two countries. d. (7 marks) Find the values of Pc, Qc, Qc, Qw, Qw, w and w* in the free trade equilibrium, for each of the following two world relative demand curves of cheese. (Hint: Drawing the world relative demand curve in the same diagram of the world relative supply curve will help you to solve this problem.) Pc (1) RD₁ = 2 Pw 1 Pc (2) RD₂ = 1 - 2 Pw
Q2. (20 marks) Consider a Ricardian model with two goods, cheese C and wine W. The unit labor input requirements are: aLc = 3, aw = 2, aic = 2, aiw = 1. (An asterisk denotes a foreign variable). The supply of labor in each country is 10, that is, L = L = 10. Assume throughout that the price of wine in each country is equal to 1, that is, Pw = Pw = 1. Questions: B (4 marks) Which country has absolute advantage and which country has comparative advantage in which goods? Explain why (using inequalities). b. (5 marks) Draw and label the world relative supply curve of cheese. c. (4 marks) Find the values of Pc, P, w and w* in the autarky equilibrium (when the two counties do not trade with each other), where w and w* are wages in the two countries. d. (7 marks) Find the values of Pc, Qc, Qc, Qw, Qw, w and w* in the free trade equilibrium, for each of the following two world relative demand curves of cheese. (Hint: Drawing the world relative demand curve in the same diagram of the world relative supply curve will help you to solve this problem.) Pc (1) RD₁ = 2 Pw 1 Pc (2) RD₂ = 1 - 2 Pw
Chapter9: Production Functions
Section: Chapter Questions
Problem 9.3P
Related questions
Question
Transcribed Image Text:Q2. (20 marks) Consider a Ricardian model with two goods, cheese C and wine W. The unit
labor input requirements are: aLc = 3, aw = 2, aic = 2, aiw = 1. (An asterisk denotes a
foreign variable). The supply of labor in each country is 10, that is, L = L = 10. Assume
throughout that the price of wine in each country is equal to 1, that is, Pw = Pw = 1.
Questions:
B
(4 marks) Which country has absolute advantage and which country has comparative
advantage in which goods? Explain why (using inequalities).
b. (5 marks) Draw and label the world relative supply curve of cheese.
c.
(4 marks) Find the values of Pc, P, w and w* in the autarky equilibrium (when the two
counties do not trade with each other), where w and w* are wages in the two countries.
d. (7 marks) Find the values of Pc, Qc, Qc, Qw, Qw, w and w* in the free trade
equilibrium, for each of the following two world relative demand curves of cheese. (Hint:
Drawing the world relative demand curve in the same diagram of the world relative supply
curve will help you to solve this problem.)
Pc
(1) RD₁ = 2
Pw
1 Pc
(2) RD₂ = 1 -
2 Pw
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