ECON3150 Sample Final Answers

An economy (Home) produces Manufactures and Food using mobile Labour (L = LF + LM) in both industries, capital (K) in manufacture, and land (T) in agriculture.  Examine the impact of trade on such an economy using a Production Possiblities diagram . The following questions will help you through this process.

   a) Draw a production possibilities curve for Food and Manufactures output for this economy (Home) given specific factors with Food on the vertical axis. (1 mark)

   b) Draw a Relative Demand/Supply Diagram for Manufacture relative to Food with representative Relative Demand (RD) and Relative Supply (RS) curves to give  equilibrium Relative Price (Po) and Output (Qo). Label axes correctly (2 marks)

   c) Draw a representative Consumption Possibilities Curve CPCo (Relative Price Line) in your PPC diagram and show equilibrium output of the goods QsFo and QsMo. (1 mark)

   d) Now draw a Relative Supply (RS*) curve for a Foreign country in your RD/RS diagram given the assumption that the foreign country has the same production functions for Food and Manufacture but more capital and and less land than the home country. (1 mark)

   e) Draw World Relative Supply (RSw) given your RS and RS* curves and show world relative price (Pw) assuming Relative Demand is the same for both countries. (2 marks)
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