Now suppose world relative demand takes the following form. Demand for apples/demand for bananas = price of bananas/price of apples.
a. Graph the relative demand curve along with the relative supply curve.
b. What is the equilibrium world relative price of apples?
c. Which country specializes in each good at this price?
d. Using separate PPFs for each country, show how this world price increases the consumption possibilities for each country.
Suppose that instead of 600 workers, Home has 1,200 workers. Everything else is the same as the previous questions.
a. Draw the new PPF for Home. What is the opportunity cost of apples in terms of bananas?
b. Draw the new relative supply curve.
c. Assuming the relative demand curve is the same as above, draw the RD curve. What is the equilibrium world relative price of apples?
d. Explain how the gains from trade differ in this scenario than they did in the previous problem?