3 Comparative Advantage (10 points) California is very fertile. Farmers can produce avocados and corn on their land, 6 and 10 units per unit of land respectively. They have 5 units of land. In the Canadian prairies one can also grow avocados and corn, at 1 and 5 units per unit of land. There are 15 units of land. Assume both countries have perfectly competitive markets. Let the utility function of consumers in each country be U = Al/201/2. Demands are thus A = I/(2pA) and C = 1/(2pc). (a) Who has the absolute advantage in producing avocados? Who has the absolute advantage in producing corn? Who has the comparative advantage in producing avocados? Who has the comparative advantage in producing corn? (2) (b) If California and Canada traded, then which goods would they trade in which direction? (1) (c) Let the price of corn be 1. For which range of prices for avocados would both countries produce avocados? For which range would only one country produce avocados? For which range would both countries produce corn? (2) (d) What is the total demand for avocados, if California only produces avocados and Canada only produces corn? What is the market price for avocados? Would farmers in each country want to change their production decision at this price? (2) (e) Canadian farmers have improved their farming techniques. Now they can produce 6 units of corn per unit of land. What is the impact on Californians: are they better or worse off? (1) (f) Now assume instead that Canadian farmers can grow avocados much better, they produce 5 units per unit of land. What does the new market price for avocados have to be if Canadians produce both avocados and corn? What will Californian farmers produce then? How much corn will Canadian farmers produce? (2) [More Difficult]