Question

The world economy consists of two regions, North and South, and two goods, manufacturing (good 1) and agriculture (good 2). In North, producing one unit of manufacturing good requires two units of labor while producing one unit of agricultural good requires one unit of labor. In South, producing one unit of manufacturing good requires five units of labor while producing one unit of agricultural good requires one unit of labor. North has 100 units of labor and South has 150 units of labor. World relative demand for manufacturing good to agricultural good is RD= (C1+C1^*)/(C2+C2^* )=(P1/P2 )^(-1) where C1 and C2 are consumption of manufacturing and agricultural goods in the North, C1^* and C2^* are consumption of manufacturing and agricultural goods in the South, and P1 and P2 are world prices of manufacturing and agricultural goods.

a).Construct the equation that describes the production possibility frontier for North. Determine the maximum production of agricultural good and of manufacturing good. What is the North opportunity cost of agricultural good in terms of manufacturing good, and where does it appear in the equation that describes North production possibilities? Draw the graph of North production possibility frontier.

Answer 1