Suppose that the equilibrium price of good x (keeping the price of good y as 1) is equal to 1. Determine the optimal production and consumption both at Home and Foreign when they open up to trade. Depict this in graph.
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 LH = 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, Cxi = Cyi, i = H, F
F. Suppose that the
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