Question
The world consists of two countries only: Alpha (A) and Beta (B). Each country produces two goods, computers (C) and desks (S). In addition, trade
The world consists of two countries only: Alpha (A) and Beta (B). Each country produces two goods, computers (C) and desks (S). In addition, trade can be described by the Ricardian Model. You are given the following information (which applies to the entire question unless otherwise stated): In Alpha, one unit of labour can produce two computers or twenty desks. In Beta, a unit of labour can produce one computer or fifteen desks. Beta is endowed with two hundred units of labour, which is fifty units less than Alpha. The free-trade relative price of computer is the weighted average of both countries' autarky relative prices, with 60% of the weight assigned to Alpha's autarky (relative) price. Both countries agree to trade 110 computers. Note: Keep your answer to 2 decimals places if needed. Be sure to show your work.
a)Which country will import computers? Explain. (4 points) b)Find the production and consumption bundles of Alpha under free trade. (5 points)
Suppose Alpha experiences a technological improvement biased to desk production such that labour productivity for desks doubles. c)What happens to the free-trade relative price of computers? Which country will export computers after this labour productivity improvement in Alpha. Explain. (7 points) d)In a well-labeled diagram (label computers on the horizontal axis), identify Alpha's levels of exports and imports before and after this change in productivity improvement. No written explanation is needed. Be sure to label the slopes of the PPFs and budget constraints, and no need to include the indifference curves. (14 points) In another well-labeled diagram (label computers on the horizontal axis), identify Beta's levels of exports and imports before and after this change in productivity improvement. No written explanation is needed. Be sure to label the slopes of the PPFs and budget constraints, and no need to include the indifference curves. (10 points)
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