Page 1Page 2Page 3Page 4NamePROBLEM SET ONEEconomics 452 International Trade Theory and Policy1. Home has 1200 units of labor available. It can produce two goods, applesand bananas. The unit labor requirement in apple production is 3, while inbanana production it is 2.a. Write the equation for Home’s PPF (in labor constraint form with generalnotation, with numbers plugged in, and in slope-intercept form).Determine Home’s maximum production of apples and bananas.Graph Home’s production possibilities frontier (with bananas on the verticalaxis, making sure to label both axes). 0b. What is Home’s opportunity cost of apples in terms of bananas and what isits interpretation? Where does it appear in the PPF equation?c. In the absence of trade, what would the price of apples in terms of bananasbe and why?2. Home is as described in problem 1. There is now another country, Foreign,with a labor force of 800. Foreign’s unit labor requirement in apple productionis 5, while in banana production it is 1.a. Write the equation for Foreign’s PPF (in all three forms). Determine Foreign’s maximum production of apples and bananas. Graph Foreign’s production possibility frontier.0b. What is Foreign’s opportunity cost of apples in terms of bananas? c. Describe the pattern of comparative advantage: which country hascomparative advantage in which good and why?3. Now suppose world relative demand takes the following form: Demand forapples/demand for bananas = price of bananas/price of applesAB BARD = D /D = P /P .a. What is the world relative supply of apples to bananas if each countryproduces only its comparative advantage good? Construct the worldrelative supply curve for apples in terms of bananas. Graph the relativedemand curve for apples in terms of bananas along with the relative supplycurve. 0b. What is the equilibrium relative price of apples in terms of bananas? Compare it to the price of apples in terms of bananas in each country in theabsence of trade. c. What does each country produce under free trade? Describe the pattern oftrade: identify which country exports apples and which exports bananas.4. Show that both Home and Foreign gain from trade. a. Write the equations for Home’s TPF (in budget constraint form with generalnotation, with numbers plugged in, and in slope-intercept form). b. Determine Home’s maximum consumption of apples and bananas. c. Write the equations for Foreign’s TPF (in all three form). d. Determine Foreign’s maximum consumption of apples and bananas. e. Graph Home’s and Foreign’s trade possibility frontier (on the earlier graphsof production possibilities). f. Determine whether each country gains from trade and
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