2. This question is about the Ricardian model with increasing returns. There are two countries in this model, Colombia (Home) and Italy (Foreign). There are two goods in this model,

coffee beans and espresso machines. Both countries are identical in terms of production technology and population. Coffee bean production exhibits constant returns to scale, a_{c}=a_{c}^{*}=\frac{1}{900} Espresso machine manufacturing exhibits increasing returns to scale. In particular, unit labor productivity depends on the quantity of labor employed. a_{e}=h\left(L_{e}\right)=\frac{1}{L_{e}^{2}} Finally, the population of each country is given by, L^{\infty}=L^{i t a}=100 a. [10 pts] Suppose both countries are initially in autarky, and that labor is allocated so that the unit labor requirement is the same in both sectors. How much labor is allocated to each sector and how much of each good is produced? (Remember the countries are identical) b. [15 pts] (5 each bullet) Now suppose that these countries open to trade, and espresso machine production is concentrated in Colombia. In particular, the free trade level of qol,is equal to the sum of autarky production of espresso machines in the two countries. The remaining labor is allocated to coffee production. • How much of each good does each country produce? • How does the wage in each country, relative to the price of each good compare to its value in autarky? What is the value of the relative wage between these two countries?