Reference no: EM132587421

One is able to use Gin (G) and Vermouth (V) to produce martini. A regular martini is produced with 2 portions Gin for 1 portion Vermouth. A dry martini is produced with 5 portions Gin and 1 portion Vermouth. The prices of a regular martini (PM) and a dry martini (PD) are fixed. You have a given supply to both Gin (G) and Vermouth (V).

a) What are the prices of Gin and Vermouth, i.e. WG and WV? You can think of these prices as analogs of the wages for labor and rental rate for capital. Hint WG and WV should be expressed as equations written in terms of PM and PD.

b) Using the previous part, answer the following question: Suppose that the price of dry gin PD increases. Does this increase change wg and wv? If you did not solve the previous part of the problem, explain intuitively what should happen to wg and w.

c) You observe that knowing PM and PD, you can solve for WG and WV in a system of two equations. Which theorem is this result the punchline of? Explain the intuition of this theorem in the broader context if international trade.

d) Derive the production possibility frontier of martini, with QM, the quantity of regular martini on the y-axis and QD, the quantity of regular martini on the x-axis.

e) For what range of prices you only produce/sell dry martini?

f) Draw the relative supply curve using the relevant axes. Label your plot as thoroughly as possible.