Home and Foreign produce two goods, TVs and cars. Each worker can produce a fixed amount of each good: A worker in Home can make either $MPL_T$ TVs or $MPL_C$ cars. A worker in Foreign can produce $MPL_T$ TVs or $MPL_C$ cars, respectively. Use the information given in the table below to answer the following questions:
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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.
Krishna S.
Consider two countries (Home and Foreign) that produce goods 1 (with labor and capital) and 2 (with labor and land) according to some constant returns to scale production functions. Initially, both countries have the same supply of labor, capital, and land. The capital stock in Home then grows. Show how the increase in the supply of capital for Home affects its production possibility frontier. Draw the relative supply curve for both the Home and the Foreign economy. If those two economies open up to trade, what will be the pattern of trade (i.e., which country exports which good)? Describe how opening up to trade affects all three factors (labor, capital, land) in both countries.
Crystal W.
Consider two countries (Home and Foreign) that produce goods 1 (with labor and capi- tal) and 2 (with labor and land) according to the production functions described in problems 2 and $3 .$ Initially, both countries have the same supply of labor ( 100 units each), capital, and land. The capital stock in Home then grows. This change shifts out both the production curve for good 1 as a function of labor employed (described in problem 2 ) and the associated marginal product of labor curve (described in problem 3). Nothing happens to the production and marginal product curves for good 2 a. Show how the increase in the supply of capital for Home affects its production possibility frontier. b. On the same graph, draw the relative supply curve for both the Home and the Foreign economy. c. If those two economies open up to trade, what will be the pattern of trade (i.e., which country exports which good)? d. Describe how opening up to trade affects all three factors (labor, capital, land) in both countries.
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