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3. (30) Suppose the world consists of two countries, Home and Foreign, which produce two goods, Bread and Fruit, using two factors, capital and labor.
3. (30) Suppose the world consists of two countries, Home and Foreign, which produce two goods, Bread and Fruit, using two factors, capital and labor. Suppose that Home has 60 units of labor and 40 units of capital while foreign has 30 units of labor and 110 of capital. Assume that the unit input requirements are given by the following in both countries: Moreover, suppose that both goods are perfect substitutes and everyone has the same preferences. a. Draw the relative demand for Bread relative to Fruit. b. Draw the PPF and the relative supply for Bread relative to Fruit for Home. c. Draw the PPF and the relative supply for Bread relative to Fruit for Foreign. d. Draw the PPF and the relative supply for Bread relative to Fruit for the world under trade only and under trade and factor mobility. Do they differ? Why? e. What are factor prices at home and abroad before trade? What are they after trade? Do they change when factor are allowed to move? Explain why. 3. (30) Suppose the world consists of two countries, Home and Foreign, which produce two goods, Bread and Fruit, using two factors, capital and labor. Suppose that Home has 60 units of labor and 40 units of capital while foreign has 30 units of labor and 110 of capital. Assume that the unit input requirements are given by the following in both countries: Moreover, suppose that both goods are perfect substitutes and everyone has the same preferences. a. Draw the relative demand for Bread relative to Fruit. b. Draw the PPF and the relative supply for Bread relative to Fruit for Home. c. Draw the PPF and the relative supply for Bread relative to Fruit for Foreign. d. Draw the PPF and the relative supply for Bread relative to Fruit for the world under trade only and under trade and factor mobility. Do they differ? Why? e. What are factor prices at home and abroad before trade? What are they after trade? Do they change when factor are allowed to move? Explain why
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