Class 2

1. Class 2 24/10/2013

2. Question1 This exercise applies the basic Ricardian model of one factor and two goods. Below you may find the unit labor requirements in Home for each of two goods. If the price per pound of shrimps (PS ) is $ 18, the hourly wage rate in the shrimp sector of Home’s economy will be equal to?

3. Question 2 This exercise applies the basic Ricardian model of one factor and two goods (cheese and wine). Below you may find the unit labor requirements in Foreign and Home for each of two goods. In the post-trade equilibrium with PC = PW = $ 20, the wage of workers in Foreign relative to the wage of workers in Home will be equal to?

4. Question 3

5. Question 4

6. Question 5 Consider two countries (Home and Foreign) that produce goods 1 (with labor and capital) and 2 (with labor and land). Initially, both countries have the same supply of labor (100 units each), capital, and land. The capital stock in Home then shrinks. This change shifts in both the production curve for good 1 as a function of labor employed and the associated marginal product of labor curve. Nothing happens to the production and marginal product curves for good 2. • Show how the decrease in the supply of capital for Home affects its production possibility frontier. • Given the decrease in the supply of capital for Home, the relative supply of Home (defined as Q1/Q2) is further to the _______ than the relative supply for Foreign. As a result, the relative price of good 1 is ______ in Home than it is in Foreign. • If those two economies open up to trade, what will be the pattern of trade (i.e. which country export which good)? • Describe how opening up to trade affects all three factors (labor, capital and land) in both countries.

7. Question 6

8. Question 7

9. Question 8