Question

  

                           Home      Foreign

Marginal Products

Cheese                       6           2

Wine                         4           3

Labor Force                 100         200

e. Suppose the price of wine in the home country before trade is equal to 2. What is the price of cheese? What is the wage?

f. Suppose that the relative price of wine after trade is equal to one. Draw the consumption possibilities frontier for both the home country and the foreign country. Again show numerical values for the vertical and horizontal intercepts.

g. Suppose that the home country consumes 240 units of cheese before trade and 240 units of cheese after trade. Calculate the amount of wine the home country will consume both before and after trade.

h. Calculate home country’s exports and imports (list the good it is exporting and the amount, and the good that it is importing and the amount).

i. Draw the world supply curve for wine. Label your axes and give numerical values on both axes.

j. Suppose the relative price of wine increases from 1 to 1.25. What effect will this have on home country’s utility (increase, decrease or no change)? What effect will this have on foreign country’s utility?

Answer 1