finalexamwkey2006

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The income expansion path is a ray from the origin through the point (x,1), so it has slope 1/x. Demand equals supply and production occurs at (100,20) if and only if 1 x = 20 100 , Solution is: { x = 5 } . b) The condition for a country to gain from trade is necessary and su - cient, so x = 5 is necessary and su cient. 2) [15 points] There are two commodities, food and cloth. Food is the numeraire. The relative world price of cloth is p . Home, a small country, imports food. (Remember that a "unit" tax or subsidy means that the tax or subsidy is on each unit of the item. In contrast, an ad valorem tax or subsidy is calculated as a percentage of the price.) Fill in the blanks a) Home uses a unit export subsidy of s , The relative price of cloth for domestic consumers 1 is. p + s . and the relative price of cloth for domestic producers is p + s . b)Home uses (only) a unit production tax of t on cloth. The relative price of cloth for consumers is p and the relative price of cloth for producers is p t .
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