2 goods - car c and ring r and 2 economies USA USA and Canada CA with populations L_(H)=40 and L_(F)=100.
Suppose that the production functions for cloth and rice are given by
MPL_(C)^(U)SA=W,MPL_(C)^(C)A=Y
MPL_(R)^(U)SA=x,MPL_(R)^(C)A=Z
a) Which country has a comparative advantage in producing car? What about the comparative advantage in producing ring? Explain
b) If the utility function of each country is U =\sqrt(Cc)\sqrt(Cr) where Cc and Cr are the consumption of car and ring, respectively. Find the optimal
consumption bundle of each country in autarky and calculate the welfare of each country
measured by the utility level. Hint: note that in autarky the consumption of each good
equals the production of that good. Also, with constant MPLs, the production of each good
is given by Yc = MPLc * Lc and Yr = MPLr * Lr
, where Yc and Yr are the production of car and ring and Lc and Lr denote the labor
used in the production of car and ring, respectively.