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
)
