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[One-factor model] Assume that there are 2 countries: Home and Foreign. And there are 2 goods:...

[One-factor model] Assume that there are 2 countries: Home and Foreign. And there are 2 goods: apple and banana. Home has 2,400 units of labor available. The unit labor requirement in apple production is 6, while in banana production it is 4. Foreign has 800 units of labor available. The unit labor requirement in apple production is 5, while in banana production it is 1.

1) What is the opportunity cost of apples in terms of bananas in Home and Foreign?

2) In the absence of trade, what would be the price of apples in terms of bananas in Home and Foreign? Why?

3) Graph the production possibility frontiers for Home and Foreign.

4) Construct the world relative supply curve.

5) Suppose that world relative demand takes the following form: Demand for apples/demand for bananas = price of bananas/price of apples. Graph the relative demand curve along with the relative supply curve.

6) What is the equilibrium relative price of apples?

7) Describe the pattern of trade.

8) Show that both Home and Foreign gain from trade.

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