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3. (Full Ricardian Model: Basic (30 points))


Consider 2 countries, Holland and

Sweden (H and S). The marginal productivities of one


year of labor in the industries Machinery (M) and Furniture (F) are given in the following


table (see attached):



Each country has a population of 10 million people, all of whom provide one unit of


Labor.


a. Graph the PPFs for Holland and Sweden. Throughout the problem, put Machinery on the


X-Axis.


b. What is the formula for the Marginal Rate of Substitution?


c. In autarky, what is the production/consumption levels of M and F in Holland? In


Sweden?


d. What is the utility level for Holland in Autarky? For Sweden?


e. Plot the excess demand and excess supply curves for Machinery at world price ratios


(P=Pm/Pf) betgreater than 1. (As part of this, you'll need to determine which country is


the excess demander and which is the excess supplier for M.)


f. At what price ratio does excess demand equal excess supply for Machinery?


g. At the price ratio you found in part f, how much Furniture is exchanged across the


countries?


h. After trade, what is the utility level for Holland? For Sweden?





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3. (Full Ricardian Model: Basic (30 points))
Consider 2 countries, Holland and Sweden (H and S). The marginal productivityes of one
year of labor in the industries Machinery (M) and Furniture (F) are given in the following
table:
Marginal Productivity of One Year of Labor
Machinery (tons)
Furniture (tons)
Holland
3
3
Sweden
2
4
Each country has a population of 10 million people, all of whom provide one unit of
Labor.
a. Graph the PPFs for Holland and Sweden. Throughout the problem, put Machinery on the
X-Axis.
As in lecture, assume that the national utility function is the same in each country and given
by a Cobb-Douglas formula: U(M,F)=M1/2F1/2. This makes
MUM
1 F 2
and MUF
1 M2
2
2
b. What is the formula for the Marginal Rate of Substitution?
In autarky, what is the production/consumption levels of M and F in Holland? In
Sweden?
d. What is the utility level for Holland in Autarky? For Sweden?
e. Plot the excess demand and excess supply curves for Machinery at world price ratios
(P=Pm/Pf) betgreater than 1. (As part of this, you'll need to determine which country is
the excess demander and which is the excess supplier for M.)
f. At what price ratio does excess demand equal excess supply for Machinery?
g. At the price ratio you found in part f, how much Furniture is exchanged across the
countries?
h. After trade, what is the utility level for Holland? For Sweden?

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