(Solved): Question 2. Consider two countries Home and Foreign producing two goods, cars and planes. Suppose th ...

Question 2. Consider two countries Home and Foreign producing two goods, cars and planes. Suppose that each worker in Home can produce 2 cars (c) or 3 planes

. Assume also that Home has 4 workers. Suppose that each worker in Foreign can produce 3 cars or 2 planes. Foreign also has 4 workers. i. Graph the production possibilities frontier for Home. What is the no-trade relative price of cars in Home? ii. Graph the production possibilities frontier for Foreign. What is the notrade relative price of cars in Foreign? iii. In which good does Foreign have a comparative advantage, and why? iv. Suppose that in the absence of trade, Home consumes 2 cars and 9 planes, while Foreign consumes 9 cars and 2 planes. Add the indifference curve for each country to the figures you have drawn for i. and ii. above. Label the production possibilities frontier (PPF), indifference curve(U1), and the no-trade equilibrium consumption and production for each country. v. Now suppose the world relative price of cars is

. In what good will each country specialize? Briefly explain why. vi. Graph the new world price line for each country in the figures above and add a new indifference curve (U2) for each country in the trade equilibrium. vii. Label the exports and imports for each country. How does the amount of Home exports compare with Foreign imports? Does each country gain from trade? Briefly explain why or why not. viii. When trade is opened, what happens to the relative price of cars in Foreign and to the relative price of cars in Home?