1. Home has 1200 units of labor available. It can produce two goods, apples and bananas. The unit labor requirement in apple production in 3, while in bananas production it is 2.(5 marks)

a) When all the labor only produce apples, how many units of apples can be produce?

b) When all the labor only produce bananas, how many units of bananas can be produce?

c) What is the opportunity cost of apples in terms of bananas?

d) In the absence of trade, what would be the price of apples in terms of bananas? Why? 2. Home is as described in problem 1. There is now also another country, Foreign, with a labor force of 800. Foreign's unit labor requirement in apple production is 5, while in bananas production it is 1.(5 marks)

a) When all the labor in Foreign country only produce apples, how many units of apples can be produce?

b) When all the labor in Foreign country only produce bananas, how many units of bananas can be produce?

c) What is the opportunity cost of apples in terms of bananas in Foreign country?

d) Describe the pattern of trade. Home country should produce? Foreign country should produce? Why?

e) Show that how both Home and Foreign country gain from trade. 3. Consider a Ricardian model with two countries, the US and Ecuador, producing two goods, bananas and machines. Suppose the unit-labor requirements are:

a_LB^US= 8, a_LB^E= 4, a_LM^US= 2, a_LM^E= 4.

Let the US have 3200 workers and Ecuador have 400 workers.(6 marks)

A. Which country has the absolute advantage in bananas? Why?

B. Which country has the comparative advantage in bananas? Why?

C. What is the autarky terms of trade in the US?

D. What would the pattern of trade be in free trade? Why?

E. How much of each good would Ecuador produce in free trade if complete specialization occurred?

F. Specify a plausible free trade terms of trade.