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The Open Economy. Now consider an open economy in which the home and foreign country trade freely. The production functions, utility functions and labor endowments
The Open Economy. Now consider an open economy in which the home and foreign country trade freely. The production functions, utility functions and labor endowments are the same as they are in question 1. Under free trade, prices will be the same in each country. Denote this world price of mopeds Pm. The (world) price of bikes is still 1. f) What is the opportunity cost in terms of bikes (number of bikes given up to get one moped) in each country ? Which country specializes in which good ? g) Write out the maximization problem for the horn e-country firm that is in operation. (the other firm produces zero). Use the first order condition to find W . h) Write out the maximization problem for the foreign-country firm that is in operation. (the other firrn produces zero). Use the first order condition to get an expression for w\
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