Question: home foreign marginal products cheese 6 2 wine 4 3...
Cheese 6 2
Wine 4 3
Labor Force 100 200
j. Suppose the relative price of wine increases from 1 to 1.25. Draw the home country’s new consumption possibilities frontier. What effect will this have on home country’s utility (increase, decrease or no change)?
k. What effect will the increase in the relative price from 1 to 1.25 have on the foreign country’s utility (increase, decrease or no change)? Explain
l. Suppose foreign’s marginal product of labor in producing wine decreases from 3 to 1 due to a disease that is affecting foreign grapes. Sketch the effect that this will have on the world supply curve for wine. Label your axes and provide numerical values.
m. Sketch the effect that the grape disease in part l will have on the foreign country’s production and consumption possibilities frontiers. It is not necessary to give numerical values but show how the curve or curves shift.
n. Assuming the values of the marginal products at the beginning of the problem, and assuming that relative price of wine is equal to one, calculate the relative wage between the two countries (w/w*).