3 suppose that in the absence of trade home consumes

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Unformatted text preview: producing television is lower in Foreign country than that in Home country. 3. Suppose that in the absence of trade, Home consumes nine cars and two televisions and Foreign consumes two cars and nine televisions. Add the indifference curve for each country to the figures in problems 1. Label the production possibilities frontier (PPF), the indifference curve (U1), and the no‐trade equilibrium consumption and production for each country. Label Home and Foreign’s no‐trade consumption points as A and A*, respectively. Answer: See the following figure. ECON 6032 International Trade and Foreign Direct Investment Prof. Larry Qiu 4. Now suppose the world relative price of car is Pc/Ptv=1. a. What good will each country specialize in? Briefly explain why. Answer: Home would specialize in cars, export cars, and import televisions, whereas the foreign country would specialize in televisions, export televisions, and import cars. The reason is because Home has a comparative advantage in cars and Foreign has a comparative advantage in televisions. b. Graph the new world price line for each country in...
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