Draw the production possibility frontier for the Home country with cloth on the horizontal axis and food on the vertical axis. Suppose the economy is engaged in free trade and the free trade relative price of cloth is given.
(a) In your PPF diagram show where the economy will produce. What condition holds at that point? (Note: Do not illustrate the consumption point - just where production takes place.)
(b) Now suppose the economy's endowment of land - the specific factor used to produce food - increases. In your PPF diagram, show the economy's new production possibility frontier. Briefly justify your answer.
(c) If the free trade relative price of cloth remains constant, illustrate in your diagram where production will now take place. Will production of food increase or decrease?