Suppose Canada produces 2 goods, wood W and socks S. There is a total of 20 workers in Canada and each one can either produce 5 units of wood or 10 pairs of socks. Workers can move freely between sectors, i.e. they can work either in the wood industry or in making socks. Canadian households' utility over these 2 goods is given by U 2 In(Qw) +3. In(Qs). 1. Write down Canada's production possibilities frontier (PPF). (Your result should have the number of workers in Canada on the right-hand side.) 2. Find the no-trade relative price Pw/Ps in Canada. 3. In class we showed that at the optimum, the slope of the indifference curve must equal the slope of the PPF, i.e. MUW MUS Pw Ps Use the given utility function to show that Qs = 3.Qw. 4. Plug this condition into the PPF and show that the optimal quantity of wood must be Qw 40. How big is the consumption of socks Qs? Now suppose that Canada can trade with China and that each worker in China can produce either 4 pairs of socks and 6 units of wood. Assume that both countries are the only ones trading. 5. Which country has an absolute advantage in which goods? 6. Which country has a comparative advantage in wood? Which one in socks? Which good will Canada specialize in? 7. We saw in class that Canada's budget with trade would now be PWorld QWPWorlds = Income. w Suppose that the world prices with trade are now PWorld = 5 and PWorld = 3. Based on your answer to (6), how high is Canada's income? 8. Use the condition from earlier, 3 MUw MUS Qw aus PWorld W PWorld and the budget to find Canada's optimal consumption of socks and wood with trade. 9. Is Canada better off with trade? Why or why not?