Candy aLc 6 hours per pound aLc 2 hours per pound Wine aLw = 5 hours per gallon

Question

Candy aLc 6 hours per pound aLc 2 hours per pound Wine aLw = 5 hours per gallon aw 6 hours per gallon Home Foreign where = number of labor hours needed to produce a unit of candy in Home; aLC LW a LC = number of labor hours needed to produce a unit of candy in Foreign; = number of labor hours needed to produce a unit of wine in Foreign LW PC = the absolute or money price of candy on world markets. Pw = the absolute or money price of wine on world markets As long as the world equilibrium relative price (Pc/Pw) lies between 0.33 and 1.2 gallons, the two countries will specialize, with all Foreign workers producing candy In the post-trade equilibrium the wage of workers in Foreign relative to the wage of workers in Home will lie betweern 0 A. 0.83 and 3 0 B. 0.33 and 3 ° C. 1.2 and 0.83 0 D. 2 and 5

Explanation / Answer

Opp cost of Candy in home=1.2wine

Opp cost of Candy in Foreign=1/3wine=0.33wine

Thus home has comparative advantage in wine and foreign in candy.

Foreign can produce 1/2 candy in one hour and gome can produce 0.2 wine in one hour

Thus 1/2 candy can be changed for 0.167 to 0.6gallons of wine

Thus foreign wage can lie=0.167/0.2 to 0.6/0.2

Foreign wage=0.83 to 3.

Ans is A

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