(a) Explain the derivation of the production possibility curve for the 2-good case. What is the significance of a linearly homogeneous production function? Explain why positions off the curve either infeasible or inefficient?

(b) A nomadic tribe in Lapland spends all its productive time hunting reindeer. Some of the reindeer meat is kept for consumption and the remainder is sold at a nearby trading station in return for other goods. It is observed that when the price of reindeer meat decreases the

amount the tribe is willing to supply increases.

(i) Using a suitable diagram, sketch this situation and determine if reindeer meat is a normal or an inferior good to the tribe.

(ii) Using a production possibility curve explain how the above analysis changes if the tribe can hunt and trade fish as well as reindeer?

(iii) Hence, in general, explain why a tax levied on the exchange of a good that affects

the amount received by an agent will affect both the production and consumption

decisions.