6. Consider a case where a country can produce Good X and Good Y, using increasing...

6. Consider a case where a country can produce Good X and Good Y, using increasing cost technology. The internal price of Good Y for the country is 1. The world price of Good Y is 2. Draw a graph with Good X on the horizontal axis and show the country (i) with no trade and (ii) optimally trading. Be sure to correctly draw the indifference curves and label all the curves, lines, and axes of your graph.

a) What circumstance must be true about economic tradeoffs for a country to reach the highest attainable indifference curve?

(b) What happens to this country’s level of economic wellbeing when it changes from trade to no trade? How do you know?

(c) As the price rises for Good Y, what happens to the production of Good Y in the country?

(d) With trade, what product does the country import? On your graph, show the amount.

(e) With trade, what product does the country export? On your graph, show the amount.

Expert Solution

Rahul Sunny answered 1 year ago

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