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Question1

Consider two countries, Home and Foreign, that produce clothing and hammers. Both countries are endowed with 100 man-hours. Home can produce either 400 units of clothing or 400 units of hammers employing the full labor force. Similarly, Foreign can produce either 300 units of clothing or 600 units of hammers using all available workers.

(a) What is the autarky relative price (PC/PH) in each country?

(b) What is the range of relative price (PC/PH) that allows both countries to enjoy gains from trade? Draw PPF’s for each country and graphically demonstrate the gains from trade.

Question 2 See file 1

Question 3 See file 2

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