Ricardian Theory - 1. Home (no asterisk) and Foreign (asterisk) produce cheese and wine with the following unit Labor requirements: Home Foreign Cheese alc = 5 alc* = 6 Wine alw = 2 alw* = 6 Home and...

Ricardian Theory - 1. Home (no asterisk) and Foreign (asterisk) produce cheese and wine with the following unit Labor requirements: Home Foreign Cheese alc = 5 alc* = 6 Wine alw = 2 alw* = 6 Home and Fore


1. Home (no asterisk) and Foreign (asterisk) produce cheese and wine with the following unit Labor requirements: Home Foreign Cheese alc = 5 alc*= 6 Wine alw = 2 alw*= 6 Home and Foreign havetotal labor forces of L=100 andL*=200workers (a)Both countriesopen up to freetrade. Graph the relative worldsupplyof cheese to wineand its response to therelativeworld price of cheese Pc/Pw based on the unit laborrequirements.Providespecificvalues on the axes. (b)Worldconsumer demand for cheese relative to wine dependson the relativeprice ofthe twogoods:(Qc + Qc*)/(Qw+ Qw*)= 6 – 5(Pc/Pw). Graphthe relative demand curve.Calculate the relative price Pc/Pw of cheese in world trade equilibrium.Calculate theproduction of Qc, Qc*, Qwand Qw*. Calculate theequilibrium wage ratesw andw* under free trade. Beexplicitabout your assumptions regarding demand (e.g.Leontief preferences).