ECONOMICS PROBLEM

Consider a Ricardian model where there are two goods: apples and bananas. For simplicity we will only consider one country called Alba (that is we will not think about its trading partner (or potential trading partner)). In Alba the unit labour requirement for an apple is 20 hours and for a banana is 10 hours. Alba has an endowment of 1000 hours of labour. Draw a production possibility frontier (PPF) diagram for Alba. Apples must be on the vertical axis and bananas must be on the horizontal axis. Suppose that if Alba does not allow its citizens to engage in international trade it will produce and consume 25 apples and it will produce and consume 50 bananas. Show this point on your diagram and label it PCA. Now suppose that Alba does allow its citizens to engage in international trade and the world price is 4 bananas for 1 apple. Show on your diagram how many apples and how many bananas are produced in Alba; please label this point as PT. With international trade 37.5 apples and 50 bananas are consumed in Alba; please label this point as CT. Finally, on your diagram label the quantity of exports and label the quantity of imports. On your diagram make sure that you state the quantities of exports and imports