question archive Standard Trade Model - Consider a country that can produce two goods: Cars (qC) and Bananas (qB)
Standard Trade Model - Consider a country that can produce two goods: Cars (qC) and Bananas (qB)
Subject:EconomicsPrice: Bought3
Standard Trade Model -
Consider a country that can produce two goods: Cars (qC) and Bananas (qB). Its PPF is "nice"(concave to the origin)and its identical agents have "nice" preferences. Assume the country is a "small" country trading freely at fixed world prices, importing Bananas and exporting Cars.
(1) Draw a plausible PPF, production and consumption points under free trade. Identify imports and exports in your graph. Use the horizontal axis for Bananas. Suppose a dictator takes power and bans all trade with the rest of the world.
(2) What happens to the relative price of Bananasin this country?
(3) Show what happens to the production bundle? the consumption bundle? Welfare?
