Instructions Please bring your written-up answers to class, which can be either hand-written (most com- mon) or a print-out, if you answer this problem set on your computer (less common). Each student has to submit an individual solution. Feel free to discuss your work with others but do not copy someone else's solutions. 1 Ricardian Model: Gains from Trade [60 points] Suppose 2 countries, Germany and France trade wine and beer with each other. 1. Name 2 reasons why Germany and France trade a lot with each other as opposed to with other trade partners. 2. Suppose each worker in Germany can produce 3 bottles of beer or 1 bottle wine. There are 50 workers in total. Draw Germany's production possibilities frontier (PPF). Place Beer on the y-axis and Qwine on the x-axis. 3. Suppose that without trade, Germany consumes 20 bottles of wine and 90 bottles of beer. Add indifference curves for this case to the diagram and label the no-trade equilibrium. 4. Now suppose that Germany and France can trade. Also assume that the world price of beer equals PWorld 2 and that of wine is PWorld = 5. How much wine would Germany be able to consume (i.e. import) at most if it fully specializes in producing beer? Beer Wine 5. Draw Germany's new budget when it specializes in producing beer. Show graphically that consumers in Germany will be at least as well off compared to the no-trade case. 6. Each worker in France can produce either 6 bottles of beer or 3 bottles of wine and France has 5 workers. Draw France's PPF. Can you in this specific case tell if France 1 6. Each worker in France can produce either 6 bottles of beer or 3 bottles of wine and France has 5 workers. Draw France's PPF. Can you in this specific case tell if France 1 will consume more or less beer than Germany did in part (3) from the PPF alone? Why or why not? 7. Suppose in the no-trade case, France optimally produced and consumed 12 bottles of beer and 9 bottles of wine. Suppose now that with trade, France specializes in wine, and the world prices are still PWorld = 2 and Pworld 5. How many bottles of beer can France now afford if it still keeps its consumption of wine at 9 bottles? Based on this calculation, does trade allow France to afford a better bundle than before? Beer =