Home has 360 units of labour, and requires 12 units of labour to produce one uni

Question

Home has 360 units of labour, and requires 12 units of labour to produce one unit cloth and 6 units of labour to produce one unit of Wine. Foreign has 240 units of labour, and requires 2 unit of labour to produce one unit of Cloth and 4 units of labour to produce one unit of Wine.

a) Find the autarkic price ratios. Which country has a comparative advantage in producing cloth?

b) Graph the world relative supply curve (Cloth relative to Wine).

c) Sketch the world relative demand curve under the assumption that (in both countries) expenditure is equally divided between the two goods. Add to this curve to the relative supply graph and label the free trade price ratio.

d) Calculate the free trade price ratio and aggregate production of each good in the trading equilibrium.

e) How many units of wine does Home export? How many units of cloth does Foreign export?

f) Demonstrate the aggregate gains from trade for each country (include the production possibilities frontier, production point, and consumption point).

g) In the trading equilibrium, what is the relative wage across countries (Home relative to Foreign)? Which country has a higher wage?

Explanation / Answer

an indifference curve connects points on a graph representing different quantities of two goods, points between which a consumer is indifferent. That is, the consumer has no preference for one combination or bundle of goods over a different combination on the same curve. One can also refer to each point on the indifference curve as rendering the same level of utility (satisfaction) for the consumer. In other words, an indifference curve is the locus of various points showing different combinations of two goods providing equal utility to the consumer. Utility is then a device to represent preferences rather than something from which preferences come.[1] The main use of indifference curves is in the representation of potentially observable demand patterns for individual consumers over commodity bundles.[2]

There are infinitely many indifference curves: one passes through each combination. A collection of (selected) indifference curves, illustrated graphically, is referred to as an indifference map.

Related Questions

Navigate

• Browse (All)
• Browse H
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.