There are two countries, Home and Foreign, which produce cheese (Qc) and wine (Qw). Home has a fixed labor supply of 4000 hours. In Home, the unit labor requirement for Qc is 4 hours/Qc and the unit labor requirement for Qw is 2 hours/Qw. Foreign also has a fixed labor supply of 4000 hours. In Foreign, the unit labor requirement for Qc is 5 hours/Qc and the unit labor requirement for Qw is 1 hour/Qw. a. Draw the production possibilities frontiers (PPFs) for each country with Qc on the x-axis.
b. Draw the relative supply (RS) curve for the world market on a new graph.
c. Assume the relative demand (RD) curve takes the form [Pc/Pw]w = Qw + Q+w/Qc + Q*c]. Draw an RD curve on the graph in part (b) and identify the world equilibrium relative price of cheese.
d. On the PPFs graphs you drew for part (a), draw the lines that represent the consumption possibilities for these countries at the equilibrium world relative price of cheese.
e. Assuming the optimal ratio for consumption is described by Pc/Pw=Qw/Qc, solve for each country's optimal consumption point after trade (and show your work). Mark it on the graph and draw the associated (generalized) indifference curves for each country.