Question

Answer questions based on the following information: There are two countries, Home and Foreign, in a hypothetical world. Each of these two countries are Ricardian economies. Each country is endowed with 1000 labor hours, which can be used to produce goods X and Y. The following table shows labor requirements per unit of each good in each country. Perfect competition prevails everywhere in the two-country world. Suppose that wand w* represent Home’s andForeign’s hourly wage rates, respectively.

Goods	Home	Foreign
X	ALx=2	A*Lx=4
Y	ALy=1	A*Ly=1

a. Foreign’s labor productivity in production of good Y relative to that in production of good X equals ______.

b. Which of the following statements is correct in terms of comparative or absolute advantage? A) Foreign commands absolute advantage over Home in production of goodX.B) Foreign commands absolute advantage over Home in production of goodY.C) Foreign commands comparative advantage over Home in production of goodX.D) Foreign commands comparative advantage over Home in production of goodY.

c. Home and Foreign are in autarky. To consume a unit of goodX, you would need to pay_____ in Home or ______ in Foreign.

d. suppose that both Home and Foreign move from autarky to a free-trade regime so that“complete specialization” occurs in each country. Then a global economy of Home and Foreign will have _______ units of good X and ______ units of good Y available for consumption under free trade.

Answer 1

a) Foreign 's labour productivity in production of good Y relative to that in production of good x is equal to the ratio of input coefficient of y with respect to x i.e. 1/4

b)opportunity cost of x in home country is Alx/Aly=2

opportunity cost of X in foreign country is 4

opportunity cost of X in home country is less than that in foreign, home has comparative advantage in X and foreign has comparative advantage in y.

the correct option is (d)

c) opportunity cost of 1unit of X in home country is 2 units of Y.

opportunity cost of 1 unit of X in foreign country is 4 units of Y.

To consume 1 units of X you would need to pay 2 units of Y in Home and 4 units of Y in foreign.

d) with 1000 units of labour, Home will produce 500 units of X and foreign will produce 1000 units o Y.