(8 points) Please consider an economy in which Good X and Good Y are produced according to X = KX .4LX .4 Y = .5KY .4LY .4 Total resources in the economy are K = 1000, L = 1000. The Societal Indifference Curve can be represented by: U = (X.75 + Y.75) 4/3 a) Please write the equation for the production possibilities frontier of this economy. What is utility in autarky? b) If this country trades with the rest of the world at PX/PY = .5, how much will be produced, how much will be consumed, and what is utility after trade? c) (optional) If this country trades with the rest of the world at PX/PY = .5 and imposes a tariff on Good X of 25% of the world price, how much will be produced, how much will be consumed, and what is utility after trade with the tariff? 2. (7 points) Please consider an exchange economy in which there are two persons (A,B) and two goods (X,Y). Individuals have utility: UA = X.5 Y.5 UB = X2/3Y1/3 The total quantities of each good are: XT = 100, YT = 100. In the initial situation, Person A has (60, 36). a) What is the equation of the contract curve? b) Which points on the contract curve make each person better off? c) If a market determines trade between these individuals, to what point on the contract curve will the two individuals trade? d) Draw your answer to part c)
