1. Assume USA and Mexico are trading partners. USA initially exports automobiles to and imports lubricants from Mexico. a. Using the standard trade model, explain how an increase in the price of automobiles, PA relative to the lubricant price, PL would affect production and consumption of auto- mobiles for the USA {assuming the taste for both goods is the same in both countries). [5 pts] b. If the income effect of the price change of automobile is greater than the substitution effect, what would happen to the automobile consumption in the USA? [3 pts] :2. Illustrate the relative supply and relative demand in this particular scenario with expla- nation. [2 pts] 2. Countries A and B have two factors of production, capital and labor, with which they produce two goods, X and Y. Technology is same in the both countries. X is capital intensive and A is capital abundant. Analyze the effects on the terms of trade and on the two countries welfare of the following: a. An increase in A's capital stock. [5 pts] 1). An increase in A's labor supply. [5 pts] 3. The. capital requirement for producing 1 unit of cloth is 3 while 0 units of labor is needed for the same job. Likewise, for food the unit capital requirement is 1 and unit labor requirement is 1. 2-1.. h. d. ['9 . g. h. The economy is endowed with 2000 units of capital and 3000 units of labor. Draw the PPF and solve for the equilibrium amount of production. [2 pts] What is the range for the relative price of cloth such that the. economy produces both cloth and food? Which good is produced if the. relatiVe. price. is outside of this range? [2 pts} '. Let the price. range is such that both goods are produced. Write down the. unit cost of producing one. unit of cloth and one. unit of food as a function of the. price of capital, 1' and labor. m. In a competitive. market. those cpsts will he equal to the prices of cloth and food. Soth'. for r and w. [2 pts] What happens to w and 1* when price of cloth rises? [2 pts] Assume there is an increase in labor from 3000 to 4000 units. Derive the. new PPF. [2 pts} How much cloth and food will the economy produce after this increase in capital supply? [2 pts] Describe. how the allocation of capital and labor between the. cloth and food sector changes. [2 pts] Thanks to facilitate yourself in this class. [1 pt] is free. for you