What is the utility level achieved by any consumer

Reference no: EM132206563

Question: There are two goods: chips and fish and two countries: Japan and Canada; Japan has unit labor requirements for both equal to 2; Canada has unit requirements for fish of 4 and 2 for chips. Assume tastes are identical across consumers and identical across countries. Assume they are Cobb-Douglas preferences with the share of income spent on fish being Î² < 1. The labor force is initially set at 800 for Japan and 400 for Canada. Answer the following questions:

a) Start in Autarky and graph each county's production possibility frontier (PPF) carefully labeling all points and the slope of the PPF.

b) Write down an individual consumer's utility maximization problem and solve for the consumer's demands for chips and fish taking prices and incomes as given.

c) Write down the production side equilibrium conditions for the model and use these plus the demands to solve for the general equilibrium in Autarky? What is the utility level achieved by any consumer in Canada and in Japan if we assume that Î² = 0.5?

d) Let the relative price of chips to fish in world markets be denoted Pc/Pf . For what relative prices would Japan specialize in the production of fish? For what values would they specialize in chips? Now ask the same questions of Canada. Explain the process by which labor would be reallocated across sectors.

e) Let Japan and Canada engage in free and costless international trade with each other. Graph the world production possibility frontier, the world relative supply curve, and the world relative demand curve. Identify the three possible outcomes in this free trading equilibrium. What are the production and trade patters associated with each possibility.

Reference no: EM132206563

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