Consider the following environment: there are two countries, Micronesia and Polynesia. There is only one factor of production, labor. Two commodities can be produced, Boats and Fish. It takes 5 hours of a Micronesian's worker time to carve 1 Boat, while a Polynesian can complete the same task in 4 hours. Catching 1 pound of Fish takes a Micronesian worker 0.5 hours while Polynesians require 1 hour. There are 1,000 worker-hours in Micronesia and 750 in Polynesia. Perfect competition prevails in all markets.
(a) Assume all workers are fully employed at all times. How much will Boat production decrease in Polynesia if Fish production must increase by 3?
(b) Solve for and plot the Production Possibilities Frontiers in the two countries. Put the quantity of Boats on the vertical axis. Which country, if any, has absolute advantage in Fish? Which of the two countries, if any, has the comparative advantage in catching Fish?
(c) Assume that the two countries are trading with each other and no one else. The overall Relative Demand is given by
Price of Fish / Price of Boat = 0.5 * (Demand for Boats / Demand for Fish).
Construct the Relative Supply curve. Put the relative quantity of Fish on the x-axis and the relative price of Fish on the y-axis. Find the equilibrium relative price and relative quantity, which clear the market.
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