Question: this question relates to the ricardian trade model suppose costs...
This question relates to the Ricardian Trade Model. Suppose costs of production depend only on labor costs, and that to produce a unit of each commodity in each country takes the number of labor hours shown.
a. Suppose the wage ratio, w/w* = 1.25. Which goods does the home country produce? Which goods does the foreign country produce? Explain clearly how you obtain your answer.
b. Draw a diagram showing relative wages (w/w*) in the vertical axis and relative labor (L/L*) on the horizontal axis. Draw the relative supply and demand curves which correspond to part a.
c. There is an increase in home labor supply L. Draw a new relative labor supply of labor such that avocados are produced by both countries. What relative wage (w/w*) is consistent with this?