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U.S. and Canada can produce root beer and maple syrup. In U.S. one bottle of root beer is produced in 1 15 # of an hour, and one bottle of maple syrup requires 1 5# of an hour to be produced. In Canada of an hour is required to produce one bottle of root beer, while one bottle of maple syrup is produced in a 1 8# of an hour. (a) For each good, which country has an absolute advantage? And for each good, which country has a comparative advantage? Explain why. (b) Compute the number of units of root beer and maple syrup that can be produced from 1 hour of labor in each country. (c) Assuming 30,000 hours of labor are available in U.S., draw the production possibility frontier and obtain its algebraic expression (suggestion: represent root beers on the horizontal axis and maple syrup on the vertical axis). Compute the slope of the PPF and explain its economic meaning. (d) Assuming 25,000 hours of labor are available in Canada., draw the production possibility frontier, obtain its algebraic expression and calculate its slope (suggestion: represent root beers on the horizontal axis and maple syrup on the vertical axis). (e) What must the relative world price of root beer (in terms of maple syrup) be so that both countries will specialize in root beer? And in maple syrup? Over what price range will each country specialize in the production of the good in which each holds a comparative advantage? (f) Construct the U.S. consumption possibility frontier with trade if the international terms of trade are 1 root beer: 2 maple syrup. Also, determine its algebraic expression. (g) When U.S. and Canada open to free trade, what will happen? (h) Suppose that the U.S. consumers always wish to consume root beer and maple syrup at the ratio 1 root beer: 2 maple syrups. What quantity of each good would the U.S. consume in autarky? What combination would the US consume with trade and complete specialization? What would be the gains from trade? (i) Discuss the gains from trade for U.S. and Canada (Suggestion: without any calculation). (j) Discuss the real wage ratio ! ! under free trade. Explain the main hypotheses describing the labor market in the Ricardian model. What has happened as a result of trade to real wages?

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