This exercise applies the basic Ricardian model of one factor and two goods. The

Question

This exercise applies the basic Ricardian model of one factor and two goods. The table below contains the unit labor requirements in Foreign and Home for each of two goods.

This exercise applies the basic Ricardian model of one factor and two goods. The table below contains the unit labor requirements in Foreign and Home for each of two goods Chocolate aLc 6 hours per pound aLC = 2 hours per pound Wine aLw 5 hours per gallorn aLw 6 hours per gallon Home Foreign where: aLc number of labor hours needed to produce a unit of chocolate in Home; aLw number of labor hours needed to produce a unit of wine in Home; a number of labor hours needed to produce a unit of chocolate in Foreign aLc a,... number of labor hours needed to produce a unit of wine in Foreign; PC = the absolute or money price of chocolate on world markets; Pw the absolute or money price of wine on world markets In post-trade equilibrium with Pc Pw - $20, the wage of workers in Foreign relative to the wage of workers in Home will be equal to OA. 0.4 OB, $2.5. OC. 2.5 O D. $10

Explanation / Answer

Solution: 0.4

Working:

Wage of workers in Foreign relative to wage of workers in Home : 20/(6+2) = 20/8 = 0.4

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