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 have total labor forces of L=100 and L*=200 workers
(a) Both countries open up to free trade. Graph the relative world supply of cheese to wine and its response to the relative world price of cheese Pc/Pw based on the unit labor requirements. Provide specific values on the axes.
(b) World consumer demand for cheese relative to wine depends on the relative price of the two goods: (Qc + Qc*)/(Qw + Qw*) = 6 – 5(Pc/Pw). Graph the relative demand curve. Calculate the relative price Pc/Pw of cheese in world trade equilibrium. Calculate theproduction of Qc, Qc*, Qw and Qw*. Calculate the equilibrium wage rates w and w* under free trade. Be explicit about your assumptionsregarding demand (e.g. Leontief preferences).