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There are two countries, Atlantis and Thule, and two goods, Clothing $($C$)$ and food $($F$)$ In Atlantis, it takes $3$ units of labour to produce a unit of Clothing and $3$ units of labour to make a unit of Food. In Thule, a unit of Clothing requires $2$ units of labour, and a unit of Food requires $5$ units of labour. Assume that Atlantis has $300$ units of labour, and Thule has $500$ units of labour. $($a$)$ What is the opportunity cost of Food in terms of Clothing in each country? $($b$)$ Which country has an absolute advantage in which good? $($c$)$ Which country has a comparative advantage in which good? Why? $($d$)$ Draw the production possibilities frontier for each country $($put Food on the horizontal axis$).$ Label axes and slopes. $($e$)$ Draw the world production possibilities frontier $($assuming labour does not move between countries$).$ Again, put Food on the horizontal axis. Label axes and important points on $-2-$ the diagram. $($f$)$ Draw the world relative supply curve $($labelled RS$)$ for F$/$C with the relative price of Food pF $/$pC on the vertical axis $($assuming labour does not move between countries$).$ Label axes and important points on the diagram. $($g$)$ On your diagram in $($f$),$ draw a Relative Demand curve $($labelled RD $1)$ that yields an equilibrium where each country is specialized in producing the good in which it has a comparative advantage. Which country exports which good? Do they both gain from trade? Why? $($h$)$ Redraw the relative supply curve from $($f$)$ and now draw a Relative Demand curve $($labelled RD $2)$ that yields an equilibrium where Thule produces both goods and Atlantis is specialized in producing only one good. Which country exports which good? Do they both gain from trade? Why? $($i$)$ Suppose that in the free trade equilibrium, p F $=2$ and p C $=1.$ Write the equation for the budget constraint for Atlantis. Draw a diagram showing both Atlantis' production possibilities frontier and its budget constraint. What good would Atlantis export if these were the prices? Would Atlantis gain from trade? Why? $($j$)$ Suppose now instead that in the free trade equilibrium, p F $=1$ and p C $=1.$ Write the equation for the budget constraint for Atlantis. Draw a diagram showing both Atlantis' production possibilities frontier and its budget constraint. How is your diagram different from $($i$)?$ Why? Is Atlantis better off or worse off at these prices as compared with those in $($i$)?$ Why?

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