Question

Relative price of apples Pa/Pb There are two countries Home and Foreign. Home has 1,200 units of labor available. It can produce two goods, apples and bananas. The unit labor requirement in apple production is 3, while in banana production it is 2. Foreign has a labor force of 800. Foreign's unit labor requirement in apple production is 5, while in banana production it is 1. Suppose world relative demand takes the following form: Demand for apples/demand for bananas = price of bananas/price of apples. 1.) Using the 3-point curved line drawing tool, draw the relative demand curve on the graph to the right. Label the curve RD. Now suppose that instead of 1,200 workers, Home had 2,400. The relative supply curve (RS) would shift to the right (as shown by RS1). 2.) Using the point drawing tool, indicate the new equilibrium relative price of apples. Label this point EQ. 0260 60 75

Answer 1

Relatve demand for apples = Price of bananas / price of apples = 1/ Relative price of apples .

It implies that relative demand for apples is the inverse function of relative demand for apples .

When P_A/ P_B = 1, then Q_A/ Q_B = 1

When P_A/ P_B = 2 , then Q_A/ Q_B =0.5

When P_A/ P_B = 4 , then Q_A/ Q_B = 0.25

When P_A/ P_B = 0.5 , then Q_A/ Q_B = 2.

Now, by plotting these points we get the relative demand curve (RD) as shown below:

RS 3 Relative qvartitns d.

Now, when relative supply curve is RS , then equilibrium relative price of apples was equal to 2.

When RS shifts to RS1 , then equilibrium relative price of apples decreases to 1.5.