5. Now suppose the world relative price of cars is PC /PTV = 1.

a. In what good will each country specialize?

Briefly explain why.

b. Graph the new world price line for each country in the figures in Problem 4, and add a new indifference curve (U2) for each country in the trade equilibrium.

c. Label the exports and imports for each country. How does the amount of Home exports compare with Foreign imports?

d. Does each country gain from trade? Briefly explain why or why not.