Suppose there are two countries, Home and Foreign, and two goods, cake and tea, produced using only labour. Firms in Home have unit labour cost 1 for cake, and 2 for tea; Foreign firms have unit labour cost 2 for cake and 3 for tea. Both countries have the same labour force L and share the same preferences; demand for good g = c, t in country j = H, F is x^j_g = Y^j/(2p_g), where Y^j is country j's income. Prices for goods are p_c and p_t, but normalise p_c = 1

If there is free trade of goods and show that the world market price for tea is p*t = 2 and derive the production, imports and exports, and wages in each country.

Home considers introducing a quota on imported tea of L/12. Determine the new supplies of tea and cake in Home and Foreign and show that in equilibrium consumer prices are p^H_t = 2 and p^F_t = 7/4.

With the new equilibrium, will the quota boost Home's tea output? How will wages and consumption change in Home and in Foreign? Will output in Home increase? Explain the effect of the quota on the world market