Assume Greece can produce 2 goods Appliances and Corn using unskilled labour (L) that is mobile between sectors. Capital (K) is specific to producing Appliances. Land (T) is specific to producing corn.

a.Use a single diagram to show how Greek labour (L) is allocated between appliances and corn. This is the combined graph with the wage curves for each sector. Hint: The graph should represent both wages which are a function of MPL and prices.

b. Describe the condition required for the labour allocation to reach a stable equilibrium. Clearly show the equilibrium in the diagram.

Now assume Greece engages in free trade and in the world market the price of corn is 20% lower than in Greece, while the price of appliances does not change.

c. Redraw the diagram in point (a) and let the price of corn fall by 20%.

d. What happens to the labour demand curves in the appliances sector and in the corn sector?

e.What happens to equilibrium wages, the allocation of labour and why?

f. Who wins and who loses in Greece after opening to trade? Briefly explain.