Question

Suppose the United States and Mexico can produce wheat and corn using only labor. The (constant) opportunity cost of producing one bushel of corn in the United States is 10 bushels of wheat. The (constant) opportunity cost of producing one bushel of corn in Mexico is 20 bushels of wheat.

1. What is the relative price of wheat in Mexico under autarky?

2. If the countries open to trade, which country will export corn? Explain.

3. What is the possible range for the relative price of corn under free trade?

4. Suppose a new form of fertilizer triples wheat productivity in the United States. How will this affect the pattern of trade?

5. Suppose that instead of tripling wheat productivity in the United States, the fertilizer had only doubled wheat productivity. How would that have affected the pattern of trade?

Answer 1

Thats the answer.