Question 2

Suppose two economies H and F produce two goods, X and Y, with only one input: labour. Production technology implies that unit labour requirements are given in the following table:

amount of labour

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per unit of output









Suppose that H has 2400 units of labour and F has 1800 units of labour.

(a) Derive the Production Possibilities Frontier (PPF) for H and F. What is the autarky equilibrium price ratio in each country? (2.5 marks)

(b) What is the range of feasible equilibrium world price ratios? (2.5 marks)

(c) Suppose these countries trade with each other at some feasible world price ratio. Which country exports good X? Why? (2.5 marks)

(d) Does trade equalize the real return to labour in Home and Foreign? Why? (2.5 marks)

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