1. Consider a small country like Canada which produce two goods: manufacturing and food products. Assume it exports manufacturing products (the capital intensive good) and im- ports food.

(i) Using a graph with production possibility frontier and community indifference curves, represent the free trade equilibrium. Make sure to identify production and consump- tion. Briefly justify your answer.

(ii) Suppose now that the Canadian government would like to increase the share of labor used in the manufacturing sector (i.e. decrease K/L used in manufacturing) while keeping full employment of the factors of production, what should the government do? Should it find a policy that contributes to increase, to decrease or to do nothing regarding the production of manufacturing goods? Explain your reasoning and use graph as appropriate.