Problem 1:

Home country has 1,200 units of labor available. It can produce two goods, apples and bananas. The unit labor requirement in apple production is 3, while in banana production it is 2.

a). Graph home's production possibility frontier.

b). What is the opportunity cost of apple in terms of bananas?

c). In the absence of trade what would be the price of apples in terms of

bananas? Why?

Now consider a foreign country as well with labor force of 800. Foreign country's unit labor requirement in apple production is 5, while in banana production it is 1.

d). Graph Foreign's production possibility frontier.

e). Construct the world relative supply curve.

Now suppose world relative demand takes the following form:

Demand for apples/demand for bananas = price of bananas / price of apples

f). Graph the relative demand curve along with the relative supply curve.

g). What is the equilibrium relative price of apples?

h). Describe the patterns of trade.

I). Show that both home and foreign gains from trade.

j). Suppose that instead of 1,200 workers, home country has 2,400. Find the equilibrium relative price. What can you say about the efficiency of world production and the division of the gains from trade between Home and Foreign in this case?

Problem 2:

Recently, computer programmers in developing countries such as India have begun doing work formerly done in the United States. This shift has undoubtedly led to substantial pay cuts for some programmers in the United States.

Answer the following two questions:

a). How is this possible when the wages of skilled labor are rising in the United States as a whole?

b). What argument would trade economists make against seeing these cuts as a reason to block outsourcing of computer programing?