This exercise applies the basic Ricardian model of one factor and two goods. The table below contains the unit labor requirements in Foreign. and Home for each of two goods. where: Home Foreign OA. 0.83 and 3. alw= Cheese aLc 6 hours per pound * aLc 2 hours per pound * aLC aLc number of labor hours needed to produce a unit of cheese in Home; number of labor hours needed to produce a unit of whiskey in Home; = number of labor hours needed to produce a unit of cheese in Foreign; * aLW = number of labor hours needed to produce a unit of whiskey in Foreign; Pc = the absolute or money price of cheese on world markets; Pw the absolute or money price of whiskey on world markets. Whiskey alw= 5 hours per gallon * aLW 6 hours per gallon As long as the world equilibrium relative price (PC/Pw) lies between 0.33 and 1.2 gallons, the two countries will specialize, with all Foreign workers producing cheese In the post-trade equilibrium the wage of workers in Foreign relative to the wage of workers in Home will lie between OB. 0.33 and 3. OC. 1.2 and 0.83. OD. 2 and 5.
This exercise applies the basic Ricardian model of one factor and two goods. The table below contains the unit labor requirements in Foreign. and Home for each of two goods. where: Home Foreign OA. 0.83 and 3. alw= Cheese aLc 6 hours per pound * aLc 2 hours per pound * aLC aLc number of labor hours needed to produce a unit of cheese in Home; number of labor hours needed to produce a unit of whiskey in Home; = number of labor hours needed to produce a unit of cheese in Foreign; * aLW = number of labor hours needed to produce a unit of whiskey in Foreign; Pc = the absolute or money price of cheese on world markets; Pw the absolute or money price of whiskey on world markets. Whiskey alw= 5 hours per gallon * aLW 6 hours per gallon As long as the world equilibrium relative price (PC/Pw) lies between 0.33 and 1.2 gallons, the two countries will specialize, with all Foreign workers producing cheese In the post-trade equilibrium the wage of workers in Foreign relative to the wage of workers in Home will lie between OB. 0.33 and 3. OC. 1.2 and 0.83. OD. 2 and 5.
Chapter9: Production Functions
Section: Chapter Questions
Problem 9.6P
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