Consider a world with two countries, Home and Foreign, and two goods, good X and

Question

Consider a world with two countries, Home and Foreign, and two goods, good X and good Y. Both countries use labor as the only factor of production. Both countries are endowed with 100 workers. [Please make sure that you add labels on figures you draw: vertical axis, horizontal axis, PPF, indifference curves, equilibrium points, etc.]

1) Find the no-trade relative price of good X (in terms of good Y) for Home and Foreign, respectively.

Good X

Good Y

Home

MPL = 2

MPL = 1

Foreign

MPL = 6

MPL = 2

Good X

Good Y

Home

MPL = 2

MPL = 1

Foreign

MPL = 6

MPL = 2

Explanation / Answer

Ans

Relative price of good x in terms of 1, is 1/2=0.5 and that of foreign country is 2/6= 0.33

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