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# ps1_solution - Econ 101 International Trade(Fall 2011...

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Econ 101: International Trade (Fall 2011) problem set #1 Page 1 of 9 Axis-intersection for the production possibility frontiers and the opportunity costs Calculations for Home: Calculations for Foreign: Home has an absolute advantage both in cheese and wine production, because and Home has a comparative advantage in wine and Foreign has a comparative advantage in cheese production, because (b) see the graphs of #1.(a) Calculation of the relative price of cheese in terms of wine for Home with and : Calculation of the relative price of cheese in terms of wine for Foreign with and : (c) relative Supply: Foreign starts to produce cheese, when the relative world price is greater than its opportunity costs of cheese in terms of wine and Home starts to produce cheese, when the relative world price is greater than its opportunity costs of cheese in terms of wine . When Home specializes in wine and Foreign specializes in cheese, they produce the relative supply of World consumers relative demand function:

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Econ 101: International Trade (Fall 2011) problem set #1 Page 2 of 9 The relative supply curve ’s y -axis intercept is The intercept of the relative supply curve and the relative demand function is Because , the quantities are: ; This pattern of production states about the pattern of trade, that both countries specialize in the goods, they have a comparative advantage in. Thus Home only produces and exports wine and imports cheese and Foreign only produces and exports cheese and imports wine. The wages differ across the countries, because labor productivity is higher in Home in all sectors. ; (d) World consumers relative demand function: ; for all positive quantities Because , the quantities are: ; ; Thus is no trade because both countries produce and consume only the wine, they have produced on their own. World consumers relative demand function: There will be no trade which as motivated by the same argument that for the consumers demand function above.
Econ 101: International Trade (Fall 2011) problem set #1 Page 3 of 9 (e) Axis-intersection for the production possibility frontiers and the opportunity costs.

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ps1_solution - Econ 101 International Trade(Fall 2011...

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