Malaysia has 300 units of labor while there are 500 units of labor in Indonesia. When they produce, the countries have the following unit labor requirements:
Malaysia Indonesia
Cameras 15 20
Rugs 10 20
(a) What is the relative price of rugs to cameras in Malaysia if there is no trade?
(b) Suppose that Malaysia and Indonesia are completely specialized when they trade. Which product will Malaysia produce?
(c) Draw the production possibility frontier for Malaysia. If Malaysia only produces the good in which it has a comparative advantage, where will its production point be on the production possiblity frontier? If the post-trade world price will be at 1, can you show that there are gains from trade? (HINT: the point of production and consumption is not the same).
(d) Does Indonesia benefit from trade when the world price for rugs to cameras is 1? Explain.
(e) Draw a world supply schedule which shows rug production relative to cameras. Label all axes, curves, intercepts, and kink points.
(f) Add a relative demand schedule to your diagram that implies that Malaysia is incompletely specialized.
(g)give suffecient condition under which both countries benefit from trade
(i)if the condition in question g is necessary and sufficeint? explain briefly.