In-class Exercise

Ricardian Model
Instructor : Protika Bhattacharjee
Question
•• Suppose
  there are two countries, Peru and Colombia. They produce 2 goods, Cheese and Apples.
Peru requires 1 hour of work to produce one unit of cheese and 2 hours of work to produce one
unit of apple. Colombia requires 3 hours of work to produce one unit of cheese and 1 hour of work
to produce one unit of apple. There are 50 hours of labor work in Peru and 70 hours in Colombia.
a. What would be the relative price of cheese ( if both the countries are in autarkic situation. (2
points)
b. Which country has comparative advantage in cheese from your answer in part a? (2 point)
c. Compute relative supply curve of cheese relative to apples. (3 points)
d. Assume that the relative demand of cheese in terms of apple is = . Compute the equilibrium price
of cheese relative to apples under free trade. (3 points).