Question: Similar to Home in Problem, Foreign also produces computers and wheat using capital, which is specific to computers; land, which is specific to wheat; and labor, which is mobile between the two sectors. Foreign has 100 workers and 100 units of land but only 10 units of capital. It has the same production functions as Home.
a. Will the no-trade relative price of wheat be higher in Home or in Foreign? Explain why you expect this outcome.
b. When trade is opened, what happens to the relative price of wheat in Foreign and to the relative price of wheat in Home?
c. Based on your answer to (b), predict the effect of opening trade on the rental on land in each country, which is specific to wheat. What about the rental on capital, which is specific to computers?
Problem: Home produces two goods, computers and wheat, for which capital is specific to computers, land is specific to wheat, and labor is mobile between the two industries. Home has 100 workers and 100 units of capital but only 10 units of land.
a. Draw a graph similar to Figure 3-1 with the output of wheat on the vertical axis and the labor in wheat on the horizontal axis. What is the relationship between the output of wheat and the marginal product of labor in the wheat industry as more labor is used?
b. Draw the production possibilities frontier for Home with wheat on the horizontal axis and computers on the vertical axis.
c. Explain how the price of wheat relative to computers is determined in the absence of trade.
d. Reproduce Figure 3-4 with the amount of labor used in wheat measuring from left to right along the horizontal axis and the amount of labor used in computers moving in the reverse direction.
e. Assume that due to international trade, the price of wheat rises. Analyze the effect of the increase in the price of wheat on the allocation of labor between the two sectors.
