2. Assume that Home and Foreign produce two goods, TVs and cars. Also assume that there is perfect competition in both product market and labor market. Use the following information to answer the questions
In the no-trade equilibrium
Home Country
Wage_TV = 12, Wage_C = ?
MPL_TV = 4, MPL_C = ?
P_TV = ?, P_C = 4
Foreign Country
Wage*_TV = ?, Wage*_C = 6
MPL*_TV = ?, MPL*_C = 1
P*_TV = 8, P*_C = ?
a. What is the marginal product of labor for TVs and cars in the Home country? What is the no-trade relative price of TVs at Home? (Hint: Solve for Wage_C first. Under perfect competition, wages are equalized across industries.)
b. What is the marginal product of labor for TVs and cars in the Foreign country? What is the no-trade relative price of TVs in Foreign?
c. Which good will each country export? Briefly explain why.
d. Suppose the world relative price of TVs in the trade equilibrium is P_TV/P_C=1. In the trade equilibrium, what is the real wage at Home in terms of cars and in terms of TVs? How do these values compare with the real wage in terms of either good in the no-trade equilibrium? (Hint: Read slides #45 to 48 of my lecture notes for Unit 2.)
e. Suppose the world relative price of TVs in the trade equilibrium is P_TV/P_C=1. In the trade equilibrium, what is the real wage in Foreign in terms of TVs and in terms of cars? How do these values compare with the real wage in terms of either good in the no-trade equilibrium?
f. In the trade equilibrium, do Foreign workers earn more or less than those at Home, measured in terms of their ability to purchase goods? Explain why.