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PS2 ans

# PS2 ans - Q1 a Prices of the goods are just their costs of...

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Q1. a) Prices of the goods are just their costs of production: p F = 8 1 = \$8 per unit of Food; p C = 8 3 = \$24 per unit of Cloth. b) The country has a comparative advantage in Food, since the autarky relative price of food is 8/24 = 1/3, which is less than the relative price of food on the world market, p F /p C = 10/20 = 1/2. It will therefore specialize completely in producing Food, moving all of its 200 workers there. Its output of food (per hour) will be 200 units, while its output of Cloth will be zero. Producing only Food, but demanding both goods, it will export Food and import Cloth. We cannot determine the quantities of exports and imports without more information about the structure of demand. National income is \$10 200 = \$2000 per hour. Q2. Which of the following characterize the Ricardian Model? a. Perfect mobility of factors across industries Yes b. Perfect mobility of factors across countries No c. Constant returns to scale Yes (Almost trivially, since, with only one factor, a proportional increase in all factors is just an increase in labor. Since output is

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PS2 ans - Q1 a Prices of the goods are just their costs of...

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