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Consider two countries, Home and Foreign, which are closed to international trade. Home has LH=1,170 units of labor available, and Foreign has LF=(0.8)*(1,170) units of
Consider two countries, Home and Foreign, which are closed to international trade. Home has LH=1,170 units of labor available, and Foreign has LF=(0.8)*(1,170) units of labor. Both countries can produce two goods, good 1 and good 2. Home's unit labor requirement in good 1 production is 9, while in good 2 production is 4. Foreign's unit labor requirement in good 1 production is 3, while in good 2 production it is 6. Assume that both countries trade with each other and that the world relative demand (RD) takes the following form: (Demand for good 1)/(Demand for good 2) = (11)/[(Price of good 1)/(Price of good 2)]. Assume that the two countries cannot trade. Compute the equilibrium price of good 1 in terms of good 2 at Home and Foreign, assuming that consumers in each country like to consume both goods. Explain how you determined this equilibrium price
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