11 Oct Consider a world consisting
of two countries, Iceland and Finland. Finland has L=300 units of labor and Iceland has L*=100 units of labor, the only input. There are two goods – fish (F) and video games (V). In Finland: MPLF=1/2 and MPLV=1/4, in Iceland: MPL*F=1/2 and MPL*V=1/2.
(a) Which country has an absolute advantage in which good(s)?
(c) What is the opportunity cost of producing fish in Finland (Iceland)? What is the opportunity cost of producing video games in Finland (Iceland)?
(b) Which country has a comparative advantage in which good?
(d) Draw the production possibilities frontier for each country. What are the production opportunity and autarky consumption opportunity sets in each country?
(e) Draw the relative supply of fish (F/V) curve for each country.
(f) Assume that each country has the same downward-sloping relative demand for fish curve. What is the autarky equilibrium relative price of fish in each country?
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