Emesfion 1 Assume that there are only two countries, the kingdoms of Florin and Guilder, each producing
only two goods, really big blocks of cheese (X) and wagonloads of grain {Y} with the single input of labor under constant costs and perfect competition. Florin, the home country, has 3 million
identical workers, each of whom can produce either 2 blocks of X or ti wagonloads of Y per year. Guilder has 9.6 million workers, each of whom can produce either 1 block of X or 4- loads of Y per year. a. Putting X on the horizontal axis, draw and label the PPFs for both Florin and
Guilder. Using indifference curves, show the consumption points (A and A”)
assuming that each country devotes a third of its labor force to dairy production and
two—thirds to wheat farming. Actual numbers {in millions] are required. b. 1’i’il’rite the PPF equation for each country. c. 1Which has the absolute advantage in Y? Which has the comparative advantage in
Y? d. Under flee trade, which country would export: which good, and why?’ This is called
the Ricardian Theorem, by the way. e. Suppose both countries fiilly specialize. Show that moving to the trade fi’om the
previous points {A and A”) could lead to more total production of both X and T. f. For each country, assuming that the price of Y relative to the price of X equals to [13, show the new Consumption Possibilities Frontier relative to the Production
Possibilities Frontier.
