Problem
Consider an economy with two goods (X and Y) and two countries (A and B). Labor endowment in country A is 10 and B is the same. In country A, to produce 1 unit of good X requires 5 units of labor, whereas 2 units of labor are required to produce 1 unit of good Y. In country B, to produce 1 unit of good X requires 2 units of labor, whereas 5 units of labor are required to produce 1 unit of good Y. Answer the following questions.
a) Derive the Production Possibility Frontier of country A and B. Draw the PPF for each country and world.
b) Which country has a comparative advantage in good X, which one in good Y? Determine the international price to make each country specialize in production based on comparative advantage.
c) Now, suppose that international price (Px/Py) is determined as 1. Utility functions for both countries are given as U(X, Y) = min{X, Y}. Using a graph, mark the equilibrium for world trade. Then calculate the amount of production and consumption in country B.
d) Describe the pattern of trade in country B in detail (you should calculate the amount of exports or imports).
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.