1. (20 pts) Suppose the world production possibility frontier (PPF) for cheese (X) and bread (Y) is given by X2+ 16Y 2= 3200, (1) and consumers' preferences can be represented by U(X, Y ) = XY. (2) (a) Graph the production possibility frontier (PPF) by plotting at least three numer- ical points on it. (b) Think about the general shape of the indifference curves, then on the same dia- gram use this information to show qualitatively where production and consumption will occur. (c) On the same diagram, show how the relative prices of cheese and bread will be determined. (d) Use the equations to compute the amounts of X and Y produced and consumed and their relative prices. Check that these numbers and your diagram are generally consistent.

2. (20 pts) Consider a small economy trading with the rest of the world and taking world prices as given. There are two goods in the world, X and Y, with prices PXand PY, and this country imports Y . (a) Illustrate this situation on a PPF diagram ( show where production and consumption take place). Put X on the x-axis. (b) Now the government puts a tariff on Y : i.e. a tax on imports of Y . This will lead to a general rise in the domestic price of Y . Indicate on the diagram the changes this will cause. (c) What did the tariff do to the welfare of consumers? Do you think the welfare of producers and/or of the government which is collecting the tariff revenue has changed enough to offset this? Why or why not? To answer this, think about what we know generally about efficiency - the answer is not in the diagram.