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Question: consider two countries that produce cloth and widgets with labour...

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Consider two countries that produce cloth and widgets with labour as the unique production factor using a linear technology. Given the following information: Unit Produced by One Worker/Hour Cloth Widgets Home 200 400 Foreign 120 60 i. What is the opportunity cost of cloth in terms of widgets for the Home country? For the Foreign country? (5 points) ii. In which good does the Home country have comparative advantage? Why? (5 points) ii. Assume that on the world market one unit of cloth trades for widgets at an equilibrium price of P/Pw-1. If the two countries trade the two goods with each other following the Ricardian model of comparative advantage, show that both countries will gain. (10 points) At the world equilibrium price (Po/Pw-1), what is the relative wage wH/w between the Home country and the Foreign country? (10 points) iv. Assuming that the equilibrium price Pe/Pw is not known, could you provide a lower and an upper bound for the relative wage WH/w*? Explain! (10 points) v. vi. Would it make any difference to anything whether we double the Home countrys maximum outputs of cloth and widgets by doubling Homes labour supply or by a. b. doubling its labour productivity in cloth and widgets production? Discuss your answers with regard to the trade pattern, and to the wage ratio (10

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