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 5, 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.

WORK IT OUT Answer the following questions using the information given by the accompanying table:

Home Foreign Absolute Advantage Number of bicycles produced per hour 4 6 ?

Number of snowboards produced per hour 6 8 ?

Comparative advantage ? ?

a. Complete the table for this problem in the same manner as Table 2-2.

b. Which country has an absolute advantage in the production of bicycles? Which country has an absolute advantage in the production of snowboards?

c. What is the opportunity cost of bicycles in terms of snowboards in Home? What is the opportunity cost of bicycles in terms of snowboards in Foreign?

d. Which product will Home export, and which product does Foreign export? Briefly explain why. LO.1