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Unformatted text preview: employed? e) Assume there are 100 units of land and 100 units of capital available. Draw the production possibilities frontier (PPF) for this economy. 2)(Specific factors model) Now there are two countries A and B. The production functions in each sector are the same as above and equal for both countries. Each economy have 100 units of labor and capital. a) If before start trading the relative price of food is equal in both economies and the ratio of the allocation of labor in the food sector relative to the manufacture sector (L F /L M ) is higher in economy A than in B, which economy has a higher endowment of land? b) Suppose there is free trade. Assume that before trade the relative price of manufacture was higher in economy B. Draw the same graph used in lecture to show how the allocation of labor between sectors change in economy B. How will the relative price of manufacture under free trade compare with the price of manufacture in the closed economies?...
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- Spring '10