Germany and Japan (star) produce airplanes and cars with the following marginal products of labor. Germany has 200 workers and Japan has 75 workers.
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Germany
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Japan
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Airplanes
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MPLA = 4
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MPL*A = 2
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Cars
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MPLC = 3
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MPL*C = 6
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a) Draw the production possibility frontiers for Germany.
b) What are the autarky relative prices of airplanes (PA/PC) in Germany and Japan?
c) Using an indifference curve, draw a possible autarky equilibrium on Germany's PPF. On your graph, label the production and consumption of airplanes and cars in Germany.
d) Germany and Japan are now open to trade. Draw a possible relative world equilibrium price of airplanes after trade (PWA/PWC) on your graph for Germany.
e) At this world relative price, draw an indifference curve to show Germany's trade equilibrium. What good will Germany import? What good will Germany export?
f) Has Germany's welfare improved with trade? Why or why not?