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.

(i) Illustrate the free-trade equilibrium with a Production Possibility curve and Commu- nity Indifference Curves. Make sure to label the axes and to identify production and consumption.

(ii) What can we say about w in this country in free trade and in autarky with respect to r

the rest of the world? Explain as precisely as possible.

K Bo Bo Ao L Figure 1 13