2. Suppose a small country produces product A and B with K and L. In free trade, it produces the quantities A0 and B0 as illustrated in Fig.1 by the two bold isoquants. We also know that it exports product B to the rest of the world.

(iv) What happens to the volume of trade between this country and the rest of the world as the result of this technological change? Explain and illustrate.

(v) What happens to w in that country as a result of the technological change? Explain r

as precisely as possible.

(vi) What would be different if the country, instead of being small, was a large country with respect to the rest of the world? Explain.

K Bo Bo Ao L Figure 1 13