Suppose France needs 4 units of labor to produce 2 unit of cheese (C), and 3 units of labor to produce 2 units of wine (W). Spain needs 3 units of labor to produce 1 unit of cheese, and 4 units of labor to produce 5 units of wine. Assume the marginal productivities of labor are constant in each country. Assume both countries have populations of 90 million.
France has a Cobb-Douglas utility function of U(C,W)=C.3W.7, making its MUc=.3(W/C).7 and MUw=.7(C/W).3
Spain has a Cobb-Douglas utility function of U(C,W)=C.6W.4, making its MUc=.6(W/C).4 and MUw=.4(C/W).6
Throughout the problem, treat Cheese as the good on the X-axis. To make your notation easier, your numbers should be in millions of units when necessary. That is, if the answer to a question is “5 million units,” then write down just “5.” Finally, to facilitate grading, ANSWER IN ORDER AND CIRCLE YOUR ANSWERS.
a.)
