Suppose there are only two countries in the world: Canada and the United States. Suppose further that there are only two goods in the world, cotton (C) and wood (W). Assume that the production possibilities frontier (PPF) for both countries is linear, and can be represented by the following equations:

PPF Canada: C = 900 - 3W

PPF U.S.: C = 2400 - 6W

a) Please draw each country's PPF. What is the slope of each PPF if W is on the vertical axis? What does this slope measure?

b) What is the opportunity cost of producing a unit of wood in the U.S.? How about in Canada?

c) Which country should specialize in wood? Which country should specialize in cotton? Why?

d) Find the interval between which the relative price of wood must fall for trade to be mutually beneficial.

e) Under what condition is the U.S. indifferent to trade? Does Canada still benefit from trade under this condition? Why or why not?