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# soln5 - Problem Set#5 Solutions Textbook Chapter 14...

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Problem Set #5 Solutions Textbook Chapter 14 Exercise 4 a.) Autarky: No trade Each worker has one unit of labor w = = Wage Income Equal consumption shares: 2 Computers of n Consumptio Computers of Price 2 Apples of n Consumptio Apples of Price w w = × = × Denote apples as the numéraire: p Computers of Price 1 Apples of Price = = Labor market equilibrium says that wage is equal in both sectors Wage must equal the number of apples a worker can produce Apples 100 Apples 160 = = South North w w In the North a worker can produce 160 Apples or 20 Computers Therefore, Cost of 160 Apples = Cost of 20 Computers: Computer per Apples 8 = North p In the South a worker can produce 100 Apples or 2 Computers Therefore, Cost of 100 Apples = Cost of 2 Computers: Computer per Apples 50 = South p

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We can now calculate consumption and production Denote: North the in produced Apples North the in produced Computers = = North North a c Therefore: Apples 80 2 Apples 160 2 = = = North North w a Computers 10 puter Apples/Com 8 Apples 80 Apples 80 2 = = = = North North North North c w c p Denote: South the in produced Apples South the in produced Computers = = South South a c Therefore: Apples 50 2 Apples 100 2 = = = South South w a Computer 1 puter Apples/Com 50 Apples 50 Apples 50 2 = = = = South South South South c w c p Employment in the North: 100 workers Employment in the South: 400 workers North South Wage, w 160 apples 100 apples Price of a computer, p 8 apples 50 apples Consumption of apples/person 80 apples 50 apples Consumption of computers/person 10 computers 1 computer Fraction of labor producing apples 50% 50% Fraction of labor producing computers 50% 50% Total production of apples 8,000 apples 20,000 apples Total production of computers 1,000 computers 400 computers 2
b.) Free Trade Free trade will equalize the prices in both parts of the world What will the price be equal to? Guess that all workers in the North produce computers

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soln5 - Problem Set#5 Solutions Textbook Chapter 14...

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