the assumptions of the Ricardian model are satisfied. Two goods are produced: organic lollipops (X) and GMO – free banana chips (Y). There are two…

the assumptions of the Ricardian model are satisfied. Two goods are

produced:

organic lollipops

(X) and

GMO

free

banana chips

(Y). There are two countries: North and

South.

Suppose that it takes 5 workers to produce a

loll

ipop

in the South and 10 workers to produce

a

lollipop

in the North. In

the South, 2

workers are needed to produce 1

unit of

chips

; while in the

North, only 1

worker is needed to

produce a unit of

chips

.

Assume that there are 80 workers in the

South and 12

0 in the North.

Let demand in each country be represented by the utility function

U

=

XY

.

(a) Find the autarky equilibrium prices and outputs in each country.

(b)

Which country will

export which good in equilibrium? Why?

(c) Find the equilibrium free trade p

rice ratio (i.e. p

x

/

p

y

)

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