HW1 - ECON 178: International Trade Spring 2009 Assignment...

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ECON 178: International Trade Spring 2009 Assignment #1 Due on Friday, April 17th, before the class . Typed assignments will receive 2% bonus . 1. The production possibility frontiers for Home and Foreign (*) are depicted in the graph below. Both countries’ labor forces are assumed equal: L = L*. (a) What is the opportunity cost of cheese in terms of wine for Home and Foreign? Which country has an absolute advantage in cheese production? Which country has a comparative advantage in cheese production? (b) Home and Foreign are trading. Each country completely specializes in one good. What is the possible range of the relative trading equilibrium prices of cheese ( / ) T c w P P ? (c) Construct the world relative supply curve, labeling all points carefully . (d) Suppose L = L* = 200 . Choose one possible relative equilibrium price ( / ) T c w P P . Is trade beneficial to both countries? Show using the real cost approach.
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2. Home (no asterisk) and Foreign (asterisk) produce cheese and wine with the
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HW1 - ECON 178: International Trade Spring 2009 Assignment...

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