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Unformatted text preview: are 1 million workers in Iceland and 1.5 million in Finland. 7. Which country has an absolute advantage in fish? In wheat? Which country has a comparative advantage in fish? In wheat Answer: Finland has an absolute advantage in both goods. Finland has a lower opportunity cost of producing wheat than Iceland, so they have a comparative advantage in wheat, while Iceland has a comparative advantage in Fish. 8. Find the autarky relative price of fish in both countries (i.e., the price of fish divided by the price of wheat), and draw the typical worker’s budget line in both countries. PF
Answer: The equilibrium relative price in Iceland is P = 1 under autarky. In W
Finland, P = 2 . W The way to find this is the following. A worker in the fish sector in Finland earns 2 PF , and a worker in the wheat sector earns 4 P . Workers in Finland, which are W
all the same, will choose to produce Fish if their income in that sector is larger, that is, P
if F >2 . They will produce wheat if F <2 ....
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- Spring '14