Q1- Consider a perfectly competitive world in which there are two countries, Home and Foreign, producing 2 goods, labell

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Q1 Consider A Perfectly Competitive World In Which There Are Two Countries Home And Foreign Producing 2 Goods Labell 1 (210.53 KiB) Viewed 46 times

Q1- Consider a perfectly competitive world in which there are two countries, Home and Foreign, producing 2 goods, labelled X and Y. Domestic input requirements to produce these goods are ax=2 and ay=3. Foreign input requirements are a*x=3 and a* v=2. Domestic and foreign population are L=L*=100. The representative consumer in both countries has preferences given by U(x, y) = (x1/3 + y1/3)3 = a) Which country has the comparative advantage in producing which good? Find autarky prices in each country. Explain. b) Draw PPFs and indifference curves for each country. Label production and consumption points in autarky. Use vertical axis for good Y. c) Draw world price line consistent with your answer to a). For the case of free trade, in the graph of each country show production, consumption, export and import. Label your diagrams carefully and completely. d) Solve consumer's problem and derive the demand function for each good. e) Calculate autarky consumption of both goods in each country. f) Derive export supply and import demand for good X. Calculate the relative world price in trade equilibrium. Calculate export, import, consumption, and production of each good in each country. g) Draw a diagram of export supply and import demand for good X. Label the equilibrium and the world price. Label your diagram carefully and completely.