What is the opportunity cost of apples in terms of bananas

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Reference no: EM131777780

Question: (International Economics, Tenth edition. Paul R. Krugman) regard deriving the relative demand, I would like to know how to derive the relative supply for the last curve? If I'm not wrong the equilibrium is at 2 but I'm not entirely sure how to derive the supply curve.

1: Home has 1,200 units of labour available. It can produce two goods, apples and bananas. The unit labour requirement in apple production is 3, while in banana production it is 2.

a. Graph Home's production possibility frontier

b. What is the opportunity cost of apples in terms of bananas?

c. In the absence of trade, what would be the price of apples in terms of bananas? Why?

2: Home is as described in problem 1. There is now also another country, Foreign, with a labour force of 800. Foreign's unit labour requirement in apples production is 5, while in banana production it is 1.

a. Graph Foreign's production possibility frontier

b. Construct the world relative supply curve

3: Now suppose world relative demand takes the following form: Demand for apples/demand for bananas = price of bananas/price of apples.

a. Graph the relative demand curve along with the relative supply curve.

b. What is the equilibrium relative price of apples?

c. Describe the pattern of trade.

d. Show that both Home and Foreign gain from trade

How do I derive the relative demand? (I know the question isn't asked in the linked above, but the information needed to do so is)

Reference no: EM131777780

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