Assume that there are only two countries in the world – Home and Foreign. Home has 2100 units of labor available. It can produce only two goods, apples and bananas, using labor as the only factor of production. In Home, the unit labor requirement in both apple and banana production is 3.
On the other hand, Foreign has 700 units of labor available. It can also produce only two goods, apples and bananas, using labor as the only factor of production. Foreign’s unit labor requirement in apple production is 4, while in banana production it is 1.
a. Graph both Home’s and Foreign’s production possibility frontiers. Clearly label the axes and the curves, and identify the intercepts.
b. Calculate the opportunity cost of producing apples in terms of bananas in both Home and Foreign.
c. In the absence of trade, what would the price of apples in terms of bananas be in both countries? Why?
d. Construct the world relative supply curve. Explain clearly the steps of deriving world relative supply curve in details. Illustrate it on a diagram. Clearly label the axes and the curve, and identify the intercepts and the critical points
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