Consider the ricardian model-describe the patterns of trade

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Reference no: EM13998360

Consider the Ricardian model. Home has 1200 unites of labor available. It can produce two goods, apples (A) and bananas (B). The unit labor requirement in apple production is 3, while in banana production it is 2.

Introduce Foreign, with a labor force of 800. FOreign's unit labor requirement in apple production is 5, while in banana production is 1.

(a) Construct the world relative supply curve, with the relative price of bananas Pb/Pa on the y-axis

(b) Suppose both Home and Foreign workers have preferences represented by the utility funtion U(Da, Db) = Da^(1/3) * Db^(2/3). Graph the RD curve along with the RS curve. Waht is the world equilibrium relative price of bananas to apples?

(d) Now suppose both countries have Leontief preferences (i.e., goods are perfect complements), so that world relative demand takes the following form: Qb/Qa = 1. Repeat parts (b) and (c) with this RD curve.

Reference no: EM13998360

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