This question is long, but the answers just need to be brief.
Two countries, Horne and Foreign, use one factor, labor, to produce two goods, C and F (Chemicals and Food). The production technology of the two goods in the two countries can be summarized in terms of unit labor requirements, which are reported in the following table: _- Foreign "n That is, Home needs no = 9 unit(s) of labor to produce each and every unit of good 0, and ap = 3 unit(s) of labor to produce each and every unit of good F; similarly, Foreign needs 0.5 = 2 unit(s) of labor to produce each and every unit of good 0, and a} = 2 unit(s) of labor to produce each and every unit of good F. Total labor force in the Home (E) and Foreign (If) country is given by: f: = 30 & II\" = 40 1. Fill the sentences with either \"Home\" or \"Foreign\" has an absolute advantage in Chemicals (good 0) has an absolute advantage in Food (good F) has a comparative advantage in Chemicals (good C) has a comparative advantage in Food (good F) Therefore, if a trade equilibrium exists, we expect to export Chemicals and import Food, while should import Chemicals and export Food. 10. Now suppose that the labor force in the Home country grows to f" = 40. (a) Is this a case of biased growth? Explain briey. (b) What happens to the world relative supply curve? Explain briey. (c) How did growth in the Home country affected Foreign's terms of trade? [Hint muming that a male equilibrium witbfu specialization still exists, compute the new equilibrium prices] | 11. How does welfare in the Foreign country change due to population growth in the Home country? [Please motivate your answer using graphical analysis, algebra, words, or a combination of the three.]2. Using the information on technology and the aggregate labor constraint, argue that the production possi- bility frontier (PPF) in the Foreign country takes the following form: QF = 20 - Qt.3. Plot the PPF for the Foreign country in the graph provided. What is the slope of the PPF? [Please label the axes, the intercepts, and the slope] The slope of the PPF is: and it represenm 4. What is the equilibrium autarky price for each country? - The autarky price in the Home country is 30\" = , because - The autarky price in the Foreign country is p'\" = , because Suppose that consumers in both countries have the same preferences, described by the following function: U(Dc_DF) = 3111 D0 + In D}? 5. Show that in every equilibrium, the relative demand in the Home country is given by: ramp) = E. [If you are not able to Show it, just take this function as given and move on] 6. What is the relative demand function in the Foreign country, i.e. RD\" (p)? What is the world's relative demand function, i.e. RD'\"(p)? Explain briey. 7. Imagine now that the two countries are allowed to trade. Assuming that an eguilibrium with full sEecialization exists, show (argue) that the world relative supply of Cloth is equal to [If you are not able to show it, just take this function as given and move on] 8. Using the world's relative demand function from 6., and the world relative supply function from 7.: (i) What is the implied equilibrium trade price? (ii) Based on your answer in (Si) argue that an equilibrium with full specialization exists. 9. In the trade equilibrium, (i) how many Chemicals and Flowers does the Foreign country consume? (ii) How many does it produce? (iii) Using this information, compute the Foreign country's import and export
