2. Consider the economy of two countries: Ethiopia (E) and Canada (C) pro- ducing two goods, bikes(B) and radios (R), initially not trading with each other. There are three factors of production, capital (K), skilled labor (S) and unskilled labor (U). Bike production uses capital and unskilled labor while radio production uses capital and skilled labor. Assume production features diminishing marginal returns in all factors of production. Ethiopia has 50,000 unskilled workers and 10,000 skilled workers while Canada has 5,000 unskilled workers and 10,000 skilled workers. [30 points] (a) Where do you expect the no-trade relative price of bikes to be lower? Explain. [3 points]

(b) How is capital allocated across sectors in Ethiopia? Illustrate with a suitable diagram. [3 points]

(c) After opening up to trade, suppose price of radios stays the same in Ethiopia. How would capital allocation and rental rate change? Explain your answer in detail with a suitable diagram. [8 points]

(d) Can unskilled workers in Ethiopia afford more bikes and radios after opening to trade? Explain your answer with a suitable diagram. [5 points]

(e) Can capital owners in Ethiopia afford more bikes and radios after open- ing to trade? Explain your answer with a suitable diagram. [5 points]

(f) Are Canadian unskilled and skilled workers better off after opening to trade? [6 points]