:Solve the following questions correctly.

Assume a Ricardian model with two countries, Home and Foreign, that both produce cars and furniture. Home has 800 units of labor (L) available. Home's unit labor requirement in the production of cars is aLC = 4, while in the production of furniture it is aLF=1. Foreign has 600 units of labor available. Foreign's unit labor requirement in the production of cars is aLC*=5, while in the production of furniture it is aLF*= 2.

a) Homes's production possibility frontier (PPF) can be described by Q C = a ? b Q F where QC denotes the output of cars and QF denotes the output of furniture. Determine the values of a and b. The value of a is: The value of b is:

b) What is the maximum amount of furniture that Home can produce? The maximum amount is:

c) Assume Home wants to produce 100 cars. How much furniture can it produce? If Home produces 100 cars, it can produce units of furniture.

d) What are the opportunity costs of furniture in terms of cars in both countries? Opportunity costs of furniture in terms of cars in Home are . Opportunity costs of furniture in terms of cars in Foreign are .

e) Assume there is free trade and the world price of cars is PTC=3, while the world price of furniture is PTF=1.

Which good will be exported by Home? Home exports . How large will be the world supply of cars and furniture, respectively? The world supply of cars equals . The world supply of furniture equals .

f) Assume again there is free trade and the world price of cars is PTC=3, while the world price of furniture is PTF=1. What is the maximum amount of cars that Home can consume? With trade the maximum amount of cars that Home can consume is .

Assume that there are two countries, Home and Foreign. Home's demand curve for manufactured goods is D = 240 ? 3 P where P denotes the price of manufactured goods. Home's supply curve is S = ? 40 + 2 P . Foreign' s export supply curve is X S = ? 100 + 5 P .

a) Derive Home's import demand curve (MD).

b) Assume Foreign and Home trade with each other at zero transportation cost. What is the world market price? What is the import volume? Provide some intermediate steps of calculation.

c) Assume now that Home introduces an import tariff (per unit) t = 5 .

Calculate :

(i) the external market price P ? T , i.e., Foreign's export price, and

(ii) the internal market price P T , i.e., the price Home's consumers have to pay.

Find the price such that Home's demand for imports of good x equals Foreign's export supply of good x. Denote this price as pW (world price). (2) Since this is a competitive market, the Home producers of good x also charge pw for good x. Find the amount of good x that Home produces and the amount that Home consumes at price pw. (2) Now the Home government decides to impose a per unit tariff on the imports of good x from Foreign of $1.25 per unit of imported good x. A tariff is simply a tax on the imports of the good Home producers of good x do not have a tariff on their goods. Like a tax, this means the price the Home consumers pay for the imported good with the tariff (call it pT) is not the price the Foreign producers get for exporting it to Home (call it pF) the difference being the tariff. Find pT and pF such that Home's demand for imports of good x equals Foreign's export supply of good x and determine the burden of the tariff on the Home consumers and the Foreign producers. (6) b. Suppose the country Foreign has the following demand and supply functions for the good x (you may assume the price p will be such that neither supply nor demand are negative): Foreign Supply: Q? = 40 + 10p Foreign Demand: Q}? = 100 10p Define Foreign's export supply of good x, EX, as Export Supply: EX = Q? Q3? Write the export supply equation EX in terms of the price. (1) 1. Tariff on Imported Good a. Suppose the country Home has the following demand and supply functions for a good x (you may assume the price p will be such that neither supply nor demand are negative): Home Supply: Q53 2 40 + 319 Home Demand: Q3 2 80 2p Home production of the good is not enough to satisfy the Home demand, so Home also imports good x from Foreign. Define Home's import demand for good x, IM, as Import Demand: [M = Q3 - QE- Write the import demand equation FM in terms of the price. (1) Question 8(20 points) Labor Market Equilibrium a) Find the value of wage w' and employment L' that characterizes the equilibrium. b) Assume that as = 1 and 0",; = 3. How much does employment grows when worker's productivity A increases by 10%? c} Is the number you obtained in part (c) identical to the elasticity of labor demand with respect to A? Which one is larger? Why? d) The government imposes a labor tax of 5%. The taxis supposed to be paid by rms. Find how much of the burden of the tax will fall on rms and how much of it will be borne by workers. Explain how part of the burden will fall on workers. Question 9 Welfare Capture The government introduces a welfare-towork type of program, similar to the EIT C program that we discussed when we study Labor Supply. Assume that the program works as follows: If the worker does not work, he gets a transfer of zero. If the worker has a job, he gets a welfare check of 5 = 30% of his wage, so the worker's compensation at any xed value of the wage is now 20% larger than it would be without the welfare program. Assume also that the labor supply elasticity is 0'3 = 1 and the labor demand elasticity is (I'd = 0.5. a) How does the welfare program change the labor supply schedule? b) Dopes the welfare program change the labor demand schedule? c} Draw the Excess of Demand Function before the government intro- duced the welfare program and the shift in the Excess of Demand Function associated with the welfare program. Use the graph to nd the sign of the change in the wage. c} Find the change in the equilibrium wage associated with this policy. d) Find the change in the labor costs {wages} associated with this policy. e} Find the change in the worker's total compensation (wage plus welfare benets) associated with this policy. f) Does the worker get an increase in his earnings of 20% once the pro- gram is introduced? Why? Does the rm \"capture\" part of the worker's welfare benet here? How? g) Now, assume that 0.; = 0. Who gets to earn the welfare benet? h) Now, instead, assume that as = 0. Who gets to earn the welfare benet