There are two countries in the world economy: Home and Foreign. Home has 3000 units of labor available. It can produce two goods, coffee (C) and sugar (S). The unit labor requirement in coffee production at home, aLc, is 4, while the unit labor requirement in sugar production, aLs, is 10. Foreign has a labor force of 1600. Foreign’s unit requirement in coffee production, a*Lc, is 10, while the unit labor requirement in sugar production, a*Ls, is 2.Graph the production possibility frontier for both Home and Foreign. Use C in the vertical axis. What is the opportunity cost of coffee in terms of sugar in both Home and Foreign? Using the information (numbers) provided above, construct the world relative supply curve. Label it RS. The horizontal axis must show the world quantity of coffee relative to the world quantity of sugar, i.e., (Qc+Q*c)/(Qs+Q*s). The vertical axis must show the relative price of coffee with respect to the price of sugar, i.e., Pc/Ps. There is a range of prices, Pc/Ps in which Home and Foreign will specialize? Show this range in your graph. Call it range E. What levels of Pc/Ps would these countries not produce any coffee at? Label this range H in the graph. Why? Add a relative demand curve to your diagram if Dc/Ds= 1/[Pc/Ps]. That is the relative demand of coffee is the inverse of the relative price of coffee. Label the demand curve you derive RD. Does the equilibrium of RD and RS produce gains from trade for both countries, Home and Foreign? Explain.

Labor Requirements in both the countries - COFFEE SUGAR Total Labor HOME 4 10 3000 FOREIGN…

Answered: There are two countries in the world…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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There are two countries in the world economy: Home and Foreign. Home has 3000 units of labor available. It can produce two goods, coffee (C) and sugar (S). The unit labor requirement in coffee production at home, aLc, is 4, while the unit labor requirement in sugar production, aLs, is 10. Foreign has a labor force of 1600. Foreign’s unit requirement in coffee production, a*Lc, is 10, while the unit labor requirement in sugar production, a*Ls, is 2.

Graph the production possibility frontier for both Home and Foreign. Use C in the vertical axis.

What is the opportunity cost of coffee in terms of sugar in both Home and Foreign?

Using the information (numbers) provided above, construct the world relative supply curve. Label it RS. The horizontal axis must show the world quantity of coffee relative to the world quantity of sugar, i.e., (Qc+Q*c)/(Qs+Q*s). The vertical axis must show the relative price of coffee with respect to the price of sugar, i.e., Pc/Ps.

There is a range of prices, Pc/Ps in which Home and Foreign will specialize? Show this range in your graph. Call it range E.

What levels of Pc/Ps would these countries not produce any coffee at? Label this range H in the graph. Why?

Add a relative demand curve to your diagram if Dc/Ds= 1/[Pc/Ps]. That is the relative demand of coffee is the inverse of the relative price of coffee. Label the demand curve you derive RD.

Does the equilibrium of RD and RS produce gains from trade for both countries, Home and Foreign? Explain.

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There is a range of prices, Pc/Ps in which Home and Foreign will specialize? Show this range in your graph. Call it range E.

What levels of Pc/Ps would these countries not produce any coffee at? Label this range H in the graph. Why?

Add a relative demand curve to your diagram if Dc/Ds= 1/[Pc/Ps]. That is the relative demand of coffee is the inverse of the relative price of coffee. Label the demand curve you derive RD.

Does the equilibrium of RD and RS produce gains from trade for both countries, Home and Foreign? Explain.

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