In order to conjecture the circumstances in these two countries under free trade, consider the following hypothetical scenario based on Ricardian model. Assume throughout that those two countries (Armenia and Costa Rica) are the only two countries in the world, at least for purposes of trade. There are two goods: computers and headphones. Consumers in both countries always spend half of their income on computers and half of their income on headphones. The only factor of production is labour. Each Armenian worker can produce 2 computers or 3 headphones per unit of time. Each Costa Rican worker can produce 1 computer or 4 headphones per unit of time. There are 50 workers in Armenia and 50 workers in Costa Rica.

Derive the relative demand curve relating the relative demand for headphones to the relative price of headphones. Work this out algebraically, and then show what the curve looks like in a diagram (put the relative price of headphones on the vertical axis and the relative quantity of headphones demanded on the horizontal axis).

• Need relative demand curve relating the relative demand for headphones to the relative price of headphones.
• Work this out algebraically, and then show what the curve looks like in a diagram (put the relative price of headphones on the vertical axis and the relative quantity of headphones demanded on the horizontal axis).