(1) Consider the economy of Happy Island that has the following domestic demand and supply equations for coffee beans:

Qd = 100 - 5P : Domestic Demand

Qs = 5P : Domestic Supply

No trade equilibrium:

1. Find the average domestic price and quantity demanded if Happy Island economy is in a state of autarky.
2. Graph the domestic demand and supply equations to illustrate the no trade equilibrium price and quantity.

Suppose the economy opens-up to free trade and the world price is $15.

1. Include the world price in your diagram.
2. Calculate domestic demand with free trade and include it in your diagram.
3. Calculate domestic supply with free trade and include it in your diagram.
4. Calculate the quantity of imports or exports and show it on your diagram.
5. Calculate consumer surplus with free trade.
6. Calculate producer surplus with free trade.

(2) Mexico and Brazil both produce paper and cement. Suppose that a Brazilian worker can produce 30 tons of paper per hour or 1 ton of cement per hour. While a Mexican worker can produce 15 tons of paper per hour or 3 tons of cement per hour.

1. Which country has the absolute advantage in the production of both goods? Explain.

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1. Draw PPF for both countries.

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1. Which country has the comparative advantage in cement?

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1. Which country has the comparative advantage in paper?

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(e) If Mexico and Brazil decide to trade, which commodity will Mexico export?

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