Consider an economy consisting of two economic agents, Fiona and Shrek. Fiona can make 5 units...

Consider an economy consisting of two economic agents, Fiona and Shrek. Fiona can make 5 units of food per day if she devotes all of her time to food production and 10 units of clothing if she does to clothing production. If she divides her time between the two production activities, her output of each good will be proportional to the time spent on each. The corresponding figures for Shrek are 10 units of food and 15 units of clothing.

a) Suppose both Fiona and Shrek consider food and clothing as perfect one-for-one substitutes. Draw the production possibility frontier (place clothing on the horizontal axis) and indicate the product mix that maximize their utilities.

b) Now suppose it becomes possible that Fiona and Shrek trade with neighbouring economies at the price ratio of Pc/Pf = 1/4 . How does this affect their production and consumption decisions? Draw a new production possibility frontier and explain your answer.

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thats it....

Rahul Sunny answered 2 years ago

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