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problem1 301 f06

# Intermediate Microeconomics: A Modern Approach, Seventh Edition

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Econ 301 – F06 PROBLEM SET 1 - due in class on Wednesday Sept 13 Wissink 1. Two countries, Inland and Outland, produce artichokes (A) and bathing suits (B). Inland can produce either 200 artichokes and no bathing suits or 100 bathing suits and no artichokes or any linear combination of the two, and Outland can produce 150 artichokes or 150 bathing suits or any linear combination of the two. a) On separate graphs draw the production possibilities frontiers for Inland and Outland. b) What is Inland's marginal opportunity cost of producing artichokes? Of producing bathing suits? What is Outland's marginal opportunity cost of producing artichokes? Of producing bathing suits? Suppose that representatives of Inland and Outland meet and decide that each could gain from trade with the other. They sign a trade agreement stating that the country with the lower cost of producing artichokes will specialize in artichoke production and produce only artichokes, whereas the country with the lower cost of producing bathing suits will specialize in bathing suit production and produce only bathing suits. Each will trade the good that it produces to the other for some quantity of the good that it does not produce. (Note that Inland and Outland engage in barter ; no money is necessary.) c) Each country is said to have a comparative advantage in specializing in the good that it produces more cheaply. Which country will produce artichokes and which country will produce bathing suits? Why? d) What is the maximum price that Inland would be willing to pay for the good that it does not produce and still be willing to participate in trade? Explain. What is the maximum price that Outland would be willing to pay for the good that it does not produce? Explain. e) Suppose that Inland and Outland agree on a price of 1.5As for 1B. If Inland were to sell to Outland all of the good that it specializes in, how much of the other good could it buy? If Outland were to sell to Inland all of the good that it specializes in, how much of the other good could it buy? On the graphs from part (a) above, use this information to draw new production possibilities frontiers for Inland and Outland. Assume trade occurs at the price of 1.5 As for 1B.

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problem1 301 f06 - Econ 301 F06 PROBLEM SET 1 due in class...

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