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                           Home      Foreign Marginal Products Cheese     

                           Home      Foreign

Marginal Products

Cheese                       6           2

Wine                         4           3

Labor Force                 100         200

1.Suppose the relative price of wine increases from 1 to 1.25. Draw the home country’s new consumption possibilities frontier.  

2. Suppose foreign’s marginal product of labor in producing wine decreases from 3 to 1 due to a disease that is affecting foreign grapes. Sketch the effect that this will have on the world supply curve for wine. Label your axes and provide numerical values.

3.Sketch the effect that the grape disease in part l will have on the foreign country’s production and consumption possibilities frontiers. It is not necessary to give numerical values but show how the curve or curves shift.

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Answer : If the relative price of wine increases from 1 to 125, then this will incite more demand in the market, and therefore the firm would employ more labor force to produce more quantity of wine in the market. This means that with an increase in the relative price, both factor of production of the product and the output quantity of the product will also increase. In the graph we can see that point Q denotes the increase in the relative price from 1 to 1.25. This increase has resulted in to employment of the units of labor force from 100 to 105 and the output quantity produced from 4 to 5 units. Answer (k: If the relative price of wine increases from 1 to 125 in the home country, this will have no impact on the foreign countrys utility. This is because, as per the given data, the foreign country is already using a far a greater number of labor force to produce a lesser number of quantity product of wine. If the price of wine increases in the home country, there will be no use of importing the product from the foreign country because, the relative in the price of wine in the short run is very less that it could impact a shift in the choice of product to be imported from the foreign country. In the longer run, if the price of the product in the home country increase to huge folds, then there may arise a situation when there may be import from the foreign country Answer 0): If the marginal product of labor in the foreign country decreases from 3 to 1, this would mean that the foreign country will have far lesser number of products (wine) in the country. The foreign country will import wine from the home country. This will directly mean that there will be greater demand for wine in the home market. The greater demand will further increase the number of labor force employed in the wine production. The increase quantity will increase the marginal output of wine and this will also lead to an increase in the price of wine in the market.m)On comparing the comparative cost/opportunity cost of producing both the products at home and foreign. We can find which country has comparative advantage of producing that product. In the above question home will produce cheese while foreign will produce wine as they have the comparative advantage in that respectively. If there is grape disease then the foreign will produce less wine because of diseases and the production curve will shift leftward in the foreign and the price of wine will increase by this the demand for wine will decrease and the production of cheese will increase as the cheese get cheaper then wine as a result the cheese production will increase because of demand of cheese in comparison with wine the home production curve will (n) The relative wage of the countries will be w- pc /alc Where w-wage rate of home country -price of cheese ale price of wine If the relative price of wine is equal to 1 then the wages of both country wl be same or relative wage will be 1.

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