Assignment problem: The country of Macondo is currently operating under autarky. It produces two goods, ice and bananas. Banana production uses 10 units of land and 5 units of labor. Ice production uses 15 units of land and 10 units of labor. The country is considering opening to trade with one, and only one, of four countries. (Note that Macondo's capital or labor abundance, and its comparative advantage, may vary relative to the different countries).
a. If Macondo opens to trade with Country A, the relative price of ice will fall in Macondo. Is Macondo land or labor abundant relative to Country A? Explain.
b. If Macondo opens to trade with Country B, the ratio of the rental rate on land to wages will fall in Macondo. Is Macondo land or labor abundant relative to Country B? Explain.
c. If Macondo opens to trade with Country C, the land to labor ratio in ice production will rise in Macondo. In which product does Macondo have a lower relative price under autarky, compared to country C? Explain.
d. Labor in Country D has organized protests opposing free trade with Macondo. Which product would Macondo import from Country D if free trade were to occur? Explain.
e. A terms of trade deterioration raises the marginal product of land in Country D. In which good does Macondo have a comparative advantage? Explain.