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2. Consider a small country whose labor endowment is 18 units and production functions in cloth and food sectors are QC = ?13LC and QF = ?10LF, with corresponding marginal products MPLC = ?13/(2?LC) and MPLF = ?10/(2?LF). Looking over your class notes, attempt the following questions. In your computations, keep/carry at least three decimal places. (a) If initial prices are P_C^1 = 7 and P_F^1 = 5.12, find quantities of labor L_C^1 and L_F^1, wage w^1, and output levels Q_C^1 and Q_F^1. (b) After commencement of trade, the prices adjust to P_C^2 = 7 and P_F^2 = 6.42. Recompute the quantities from the part (a): labor L_C^2 and L_F^2, wage w^2, and output levels Q_C^2 and Q_F^2. (c) Carefully explain which agents or groups of agent are hurt by the trade and which benefit from trade. (d) Support your explanations in part (c) by creating the table whose rows list workers, land owners, and capital owners, and columns are real wage/income at the initial prices, real wage/income at the new prices, and change in real wage/income. (e) Write down the budget constraint using the information from part (b), denoting consumption levels of cloth and food by DC and DF, respectively. (Hint: first compute the total income earned by the economy at (Q_C^2, Q_F^2).) (f) Find a point (DC, DF) on the budget constraint, which has higher consumption levels of both cloth and food than the original production point (Q_C^1, Q_F^1). Then explain the how the country can achieve this point via trade, i.e., what the country has to sell and buy in which quantities. (For hint, see Figure 4-11 on page 66 and the accompanying discussion in the text.) (g) Lastly, carefully explain why the point you provide in part (f) really does represent the net gains from trade for the country.

          2. Consider a small country whose labor endowment is 18 units and production functions in cloth and food sectors are QC = ?13LC and QF = ?10LF, with corresponding marginal products MPLC = ?13/(2?LC) and MPLF = ?10/(2?LF). Looking over your class notes, attempt the following questions. In your computations, keep/carry at least three decimal places.
(a) If initial prices are P_C^1 = 7 and P_F^1 = 5.12, find quantities of labor L_C^1 and L_F^1, wage w^1, and output levels Q_C^1 and Q_F^1.
(b) After commencement of trade, the prices adjust to P_C^2 = 7 and P_F^2 = 6.42. Recompute the quantities from the part (a): labor L_C^2 and L_F^2, wage w^2, and output levels Q_C^2 and Q_F^2.
(c) Carefully explain which agents or groups of agent are hurt by the trade and which benefit from trade.
(d) Support your explanations in part (c) by creating the table whose rows list workers, land owners, and capital owners, and columns are real wage/income at the initial prices, real wage/income at the new prices, and change in real wage/income.
(e) Write down the budget constraint using the information from part (b), denoting consumption levels of cloth and food by DC and DF, respectively. (Hint: first compute the total income earned by the economy at (Q_C^2, Q_F^2).)
(f) Find a point (DC, DF) on the budget constraint, which has higher consumption levels of both cloth and food than the original production point (Q_C^1, Q_F^1). Then explain the how the country can achieve this point via trade, i.e., what the country has to sell and buy in which quantities. (For hint, see Figure 4-11 on page 66 and the accompanying discussion in the text.)
(g) Lastly, carefully explain why the point you provide in part (f) really does represent the net gains from trade for the country.

2. Consider a small country whose labor endowment is 18 units and production functions in cloth and food sectors are QC = ?13LC and QF = ?10LF, with corresponding marginal products MPLC = ?13/(2?LC) and MPLF = ?10/(2?LF). Looking over your class notes, attempt the following questions. In your computations, keep/carry at least three decimal places.
(a) If initial prices are PC^1 = 7 and PF^1 = 5.12, find quantities of labor LC^1 and LF^1, wage w^1, and output levels QC^1 and QF^1.
(b) After commencement of trade, the prices adjust to PC^2 = 7 and PF^2 = 6.42. Recompute the quantities from the part (a): labor LC^2 and LF^2, wage w^2, and output levels QC^2 and QF^2.
(c) Carefully explain which agents or groups of agent are hurt by the trade and which benefit from trade.
(d) Support your explanations in part (c) by creating the table whose rows list workers, land owners, and capital owners, and columns are real wage/income at the initial prices, real wage/income at the new prices, and change in real wage/income.
(e) Write down the budget constraint using the information from part (b), denoting consumption levels of cloth and food by DC and DF, respectively. (Hint: first compute the total income earned by the economy at (QC^2, QF^2).)
(f) Find a point (DC, DF) on the budget constraint, which has higher consumption levels of both cloth and food than the original production point (QC^1, QF^1). Then explain the how the country can achieve this point via trade, i.e., what the country has to sell and buy in which quantities. (For hint, see Figure 4-11 on page 66 and the accompanying discussion in the text.)
(g) Lastly, carefully explain why the point you provide in part (f) really does represent the net gains from trade for the country.

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