1. Assume Ricardian world with 2 countries, Home and Foreign, and 2 goods, steel and airplanes. Each country is endowed with 90 person-hours.
2. The unit labor requirement for production of 1 airplane in Home is 3 person-hours and the unit labor requirement for production of 1 ton of steel is 9 person-hours.
3. In Foreign, the unit labor requirement for production of 1 airplane is 9 person-hours and the unit labor requirement for production of 1 ton of steel is 3 person-hours.
4. a)Write equations for production possibility frontiers for each country. Draw PPF graphs for both countries with airplanes on the horizontal axis.
5. b)What is the slope of PPF for Home and how do you interpret it?
6. (BONUS) What is the marginal rate of transformation for the world economy if the trade is allowed? Explain
7. the economic meaning of MRT and show how to derive it with calculus.
8. c)Show potential gains from trade on your graph.
9. d)Draw a relative supply and relative demand diagram once trade is allowed. Measure quantity as a relative
10. number of planes to tons of steel. Label all axes and curves and mark relative prices (Pplanes/Psteel) at which
11. the relative supply curve has kinks.
12. e)Assume the relative price is equal to 2, what will the two economies produce and export/import? How large the
13. relative supply is going to be?
14. f)Assume the relative price is equal to 1, what will the two economies produce and export/import? How large the
15. relative supply is going to be?
16. g)Assume the relative price is equal to 0.1, what will the two economies produce and export/import? How large
17. the relative supply is going to be?