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Countries A and B have identical production possibilities frontiers for producing goods X and Y under increasing-cost conditions. Residents of A prefer to consume large
Countries A and B have identical production possibilities frontiers for producing goods X and Y under increasing-cost conditions. Residents of A prefer to consume large amounts of X and small amounts of '1'. Residents of B prefer to consume large amounts of good Y and small amounts of good X. (a) What conditions must be the same in the two countries to result in identical production possibilities frontiers? Explain. [4 marks] (b) Illustrate the autarlq.r equilibrium for the two countries. [4 marks] (c) What is the pattern of comparative advantage? Explain. [4 marks] (d) If the two countries open trade, how will they specialize their production? Which country will produce which good? Will the}.r specialize completely or only partially? Explain. What will determine the equilibrium terms of trade? [3 marks]
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