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Home has 1,200 workers. It can produce two goods, apples(QA) and bananas(QB). The unit labor requirement in apple production is 3, while it is 2 in banana production. Foreign has 800 workers, Foreign's unit labor requirement for apples is 10 and it is 2 for bananas.

a. draw the PPF for home(with the production of apples on x-axis). what is the opportunity cost of apples in terms of bananas?

b. Draw the relative supply curve.

c. Draw the relative demand curve when the demand for apples/demand for bananas = the price of bananas/price of apples. What is the equilibrium world relative price of apples? MORE INFO: You want to think about this as ((Qa+Qa*)/(Qb+Qb*)) = (Pb/Pa), where (Pb/Pa) is the world price.  Imagine a RD curve drawn on a graph. If you plug in  ((Qa+Qa*)/(Qb+Qb*)) = 1/4 into the RD, then the value of (Pb/Pa) at that point on the RD equals 4/1, or 4. Similarly, if  ((Qa+Qa*)/(Qb+Qb*)) = 1/3, then  (Pb/Pa)=3. If ((Qa+Qa*)/(Qb+Qb*)) = 1/2, then  (Pb/Pa)=2. And if ((Qa+Qa*)/(Qb+Qb*)) = 1, then  (Pb/Pa)=1. This maps out a relative demand curve. You can then see where these points would cross the RS. The point where RD=RS determines the equilibrium world price.

Business Economics, Economics

  • Category:- Business Economics
  • Reference No.:- M92234386

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