Assume there are two countries, Home and Foreign. Home has 1000 labor hours available. It can produce two goods, apples and bananas. The unit labor requirement in apple production is 2, while in banana production is 4. Foreign has 600 labor hours available. Foreign’s unit labor requirement in apple production is 5, while in banana production it is 1.
(a) Construct the world relative supply curve. [Note: on the horizontal axis there is( QA+QA*/QB+QB* )and on the vertical axis there is (PA/PB)]
(b) Draw the two possible demand curves and identify the possible equilibria.
(c) Identify the “normal outcome of trade,” state what each country produces in correspondence of the “normal outcome of trade” (including the reason behind your statement).