Answer to Question #44835 in Finance for Mohseen Khan

Question

Two countries, C and D, produce olive oil and beer. The labor requirements
for the production of one unit of each product in countries C and D are given in
the following table:

(labor hours per unit of output)

Commodity
Country Olive oil beer
C 8 2
D 2 4

Country C has 200 and country D has 1000 unit of labor available.

(a) Which country has an absolute advantage in the production of olive oil and which in the production of beer? Which country has a comparative advantage in the production of olive oil and which in the production of beer?

(b) What are the relative prices in each country in autarky?

(c) The World Relative Demand (RD) for beer is QB /QO =0.4 - 0.2(PB / PG ) .
Determine the world equilibrium under free trade and describe the pattern of
trade.

(d) Determine the relationship between wages in each country under free trade
(assume perfect competition in product and input markets).