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Unformatted text preview: YELLOW EXAM Q1.--- Home OCf = 2/4 = 1/2 Foreign OC*f = 10/10 = 1 Absolute advantage in food (in fact, in everything): Foreign, asterisk Comparative advantage in food: Home L, L* do not matter for comparative advantage b/c they cancel from the ratios. Do (do not) matter for absolute advantage if measured in output terms (if measured in productivity terms). 1 < PM/PF < 2 Yes b/c consumers are better off, or other brief reason Q2.--- From graph, the equilibrium relative price PM/PF =1.5; QM*=QF=0 because Home specializes in good M and Foreign specializes in F aLM/aLF=1, because Home specializes in M. PM=w L/10 PF=w* L*/30 Divide PF by PM, w/w* = (PM/PF) (aLF*/aLM) = 1.5 x 3 = 4.5 Q3.--- Home Foreign aL/a*L Apples 1 3 1/3 Bananas 2 3 2/3 Cherries 4 6 2/3 Dates 8 12 2/3 Engines 10 30 1/3 Apples and Engines are the goods with Home's strongest comparative advantage over Foreign. No, the ratios are not opportunity costs. The ratios are ratios of factor requirements. But, because goods can be ranked by relative labor requirements and any good will only be produced where it is the cheapest, ranking the goods provides...
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