Consider some economy D (Denmark), which produces two goods, beer and flowers. It takes one

unit of labor for D to make a unit of flowers, and 2 units of labor to produce beer. D has 48 units of

labor available. Call the quantity of flowers consumed by Denmark F_d , and the quantity of beer

consumed by Denmark B_D

a. What is the opportunity cost of beer in Denmark in autarky?

b. The optimal production choice in autarky (which must also be consumption in autarky) in Denmark is 24 flowers and 12 beer. Draw a graph illustrating this optimal choice, labeling the relevant values (endpoints, output, and opportunity cost, and social welfare.

c. Suppose Denmark is a small economy, taking the world price as given. The international price ratio is 1 flower for 1 beer. Denmark chooses to specialize completely when they open up their economy.

i. What is the equation of their consumption possibilities curve (along which they will trade with foreign countries)

ii. Name one specific point (there are many!) on this consumption possibilities curve where Denmark engages in some trade, but where they are NOT macroeconomically better off than in autarky.

iii. Name one specific point (there are many!) on this consumption possibility curve where Denmark engages in some trade, and where they ARE macroeconomically better off than in

autarky.

iv. Illustrate the consumption possibilities curve and the points you've chosen in items ii and iiiv in a graph.

Now, unlike in part c, assume that Denmark is "large": it is one of only two trading partners in the world. D's only trading partner is country E (England). It takes three units of labor for E to make a unit of flowers (total English flower consumption = F_E,), and 1 unit of labor to produce beer (total beer consumption = B_E). England has 54 units of labor. In autarky, England chooses to produce 27 beer and 9 flowers. When D and E trade, both countries completely specialize. Let be the international price P_B of beer and P_F be the international price of flowers (that is, the price ratio may not be 1/1).

When the two countries trade optimally, they will "share" world output equally. Symbolically, B_e=B_D and F_E=F_D

d. Given these two trading partners,

i. What is the equation for England's consumption possibilities curve?

ii. How much beer will be traded and many flowers will be traded?

iii. What is the world relative price of beer?

iv. Draw two graphs, one for each country, illustrating the movement from autarky to productive

specialization to the optimal allocation of goods under trade. Label the relevant values

(endpoints, production and consumption, and price ratios) precisely.