Problem 7. Again consider the input-output relationships for soda of the US and Italy. Table 4: Good US Italy Pepsi 3 8 Coke 2 6 However, now we will introduce wages and exchange rates. Let WUS be the hourly wage rate in the US and WIT the hourly wage rate in Italy. Naturally, these wages are not paid in the same currency, hence, we will need to make use of the exchange rate that translates one unit of Italy's euros into US dollars, which we denominate as E. (a) Formulate conditions for the relative wage ratio between the US and Italy such that trade can take place along the lines of comparative advantage. (Hint: First derive the comparative advantage of each country. Assume that the price of each soda is the product of the hourly wage rate and the technical coefficient of the respective country. Then think about which price ratio would render the countries indi'erent between trading and not trading and which relative wage ratio would get us there. ) (13) Now suppose that the Italian government introduces a minimum wage which is 20 times higher than in the US. Will the countries still trade along the line of comparative advantage? (Hint: You can assume that the eachange rate is st-"ed and will not be aected by the minimum wage requirement) (c) You may nd the result of the previous subquestion quite surprising. This is likely due to the very restrictive assumptions we are making. Please shortly list them and, if possible, explain why they may be unrealistic