Practice Problem 3
• Ricardian Model: In Home, the unit labor requirement for shoes, $a_{LS}$, equals 1, and the unit labor requirement for trucks, $a_{LT}$, equals 1. Home has 1,000 workers. In Foreign, the unit labor requirement for shoes, $a_{LS}$, equals 8, and the unit labor requirement for trucks, $a_{LT}$, equals 2. Foreign has 8,000 workers.
• Draw the PPFs with trucks on the x-axis
• Who has absolute advantage in each good?
• Who has comparative advantage in each good?
• Draw the Relative Supply Curve of Trucks/Shoes for the world market
• Assume the usual inverse of the price ratio to quantity ratio as the demand curve. Find the equilibrium price and quantity.
• Show the consumption possibilities and find the optimal consumption point