1.(Ricardian PPF: 20 points) Suppose the U.S. needs 20 units of labor to make a 100 tons of steel and 30 units of labor to produce 900 feet of lumber. In Canada, 20 units of labor are required to produce a 60 tons of steel and 25 units of labor to produce 1,000 feet of lumber.Assume the marginal productivities of labor are constant in each country. Assume that U.S. has a population of 300 million and Canada has 35 million, all of whom provide one unit of labor.

a.What is the marginal product of labor in the U.S. for steel?For lumber?

b.What is the marginal product of labor in Canada for steel?For lumber?

c.Which good, if any, does the U.S. have an absolute advantage in production?Canada?

d.Which good, if any, does the U.S. have a comparative advantage in production?Canada?

e.Graph the PPFs for U.S. and Canada.Plot Steel on the X-axis.

f.What is the autarky price ratio in the U.S.?In Canada?

g.If the U.S. and Canada began to trade, the free trade price ratio would lie in the interval [L,H].What are L and H?

NOTE:The information in this question will be used in another problem later in the assignment.

2.Full Ricardian Model: Basic (30 points))

Consider 2 countries, Holland and Sweden (H and S).The marginal productivities of one year of labor in the industries Machinery (M) and Furniture (F) are given in the following table:

Marginal Productivity of One Year of Labor

Machinery (tons) Furniture (tons)

Holland 3 3

Sweden 2 4

Each country has a population of 10 million people, all of whom provide one unit of Labor.

a.Graph the PPFs for Holland and Sweden.Throughout the problem, put Machinery on the X-Axis.

As in the lecture, assume that the national utility function is the same in each country and given by a Cobb-Douglas formula: U(M,F)=M^1/2F^1/2.This

see the picture makes.

1 F2 1 M2 . MUM = andMUF 2 1 2 M2 F2