Suppose further that consumers in both countries have identical Leontief preferences, utility function U(Cr, Ce) = min(Cr, CE), meaning that they want to consume the two goods in a fixed proportion of one-to-one, i.e. CF = CE (there is no substitution between the goods). d. Under autarky (no trade), find for each country: the equilibrium relative price, i.e. PF/PE; the quantities produced and consumed of each good. Now consider free trade between the two countries. e. Determine (and draw) the world relative supply (of fish to edamame) and the relative demand. Show that the equilibrium relative price, Pf/PE, is 2/3.
Suppose further that consumers in both countries have identical Leontief preferences, utility function U(Cr, Ce) = min(Cr, CE), meaning that they want to consume the two goods in a fixed proportion of one-to-one, i.e. CF = CE (there is no substitution between the goods). d. Under autarky (no trade), find for each country: the equilibrium relative price, i.e. PF/PE; the quantities produced and consumed of each good. Now consider free trade between the two countries. e. Determine (and draw) the world relative supply (of fish to edamame) and the relative demand. Show that the equilibrium relative price, Pf/PE, is 2/3.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Suppose further that consumers in both countries have identical Leontief preferences,
utility function U(Cr, CE) = min(Cr, CE), meaning that they want to consume the two
goods in a fixed proportion of one-to-one, i.e. Cr = CE (there is no substitution between
the goods).
d. Under autarky (no trade), find for each country: the equilibrium relative price,
i.e. Pr/PE; the quantities produced and consumed of each good.
Now consider free trade between the two countries.
e. Determine (and draw) the world relative supply (of fish to edamame) and the
relative demand. Show that the equilibrium relative price, Pf/PE , is 2/3.
Transcribed Image Text:Ricardo Model: Suppose there are two countries, Home and Foreign, that produce
two goods, fish (F) and edamame (E), using only labor. In the Home country 6 units
of labor are required to produce each unit of fish and the same for each unit of
edamame. In the Foreign country, 2 units of labor is required to produce each fish and
3 units of labor are required for each unit of edamame. Each country has a labor force
of 30 units available for production.
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