Consider an economy with two consumers, Indigo and Jamal, who each have two tradable goods: food and clothing.

5. Write an equation that summarises the relations between the marginal rate of substitution, relative prices and the marginal rate of transformation in equilibrium for an economy with exchange and production of food (F) and clothing (C).

Explain in full these relations and illustrate your answer with a fully labelled and explained production possibility frontier (PPF) diagram with food on the horizontal axis and clothing on the vertical axis. (8 marks)