Question

Ricardo Model: The problems below require the use of the following information. There are two countries H and F that can produce two goods, coffee and donuts. The following data describes the endowment and technologies:

MPL - Marginal Product of Labor

	MPLcoffee	MPLdonuts	Labor Endowment (LE)
Home(H)	2	1	100
Foreign(F)	3	2	200

Show the relative supply – relative demand diagram depicting the international equilibrium for the information above. Let the relative price and quantity displayed be for donuts in terms coffee. Draw the case where both countries gain from trade. Provide numbers where you can.   

The next part ask you to analyze how technology shocks change the international equilibrium.

Suppose that the marginal product of labor in H for both goods doubles. Show how this shock affects the welfare of consumers in F using the PPF-Budget Constraint-Indifference curve diagram. Cover the range of possible outcomes (but no need for numbers). Use the relative supply – relative demand diagram in your answer.

Answer 1

THE RELATIVE SUPPLY AND DEMAND CURVES are the curves that show the demand and supply of one product relative to another product.