Problem
In this question we will examine the aggregate demand curve for labor that arises in autarky, and under free trade. Make all the usual assumptions of the 2x2 economy.
(a) First consider the autarky economy, where there is a single representative consumer in the country, and the prices for the goods are determined by supply = demand. Suppose that the endowment of labor increases. Then verbally trace through the effects on the outputs of the goods, relative prices of the goods, and then factor prices. Graph the relationship between the labor endowment and the real wage. (b) Now consider the same economy but with free trade, and fixed world prices. If there is an increase in the labor endowment, what is the effect on the real wage? Graph this relationship.
(c) Reconsider your answer to part (b), supposing that the labor endowment grows so large that the country moves outside its cone of diversification. How will further increases in the labor endowment affect the real wage? Add this to your graph.
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.