Draw a PPF for The Federated States of Econesia (FSE) which can produce 1,000 diamonds if it devotes all

resources to diamond production or 4,000 automobiles if it devotes all resources to automobile production.

There is an increasing opportunity cost of producing each good.

a) Draw a point "A" on your graph indicating the production of 500 diamonds and 2,000 automobilies.

b) Draw a point "B" on the graph that would be an autarky equilibrium point. Be sure to add all

information to help someone else realize that this is an autarky equilibrium point.

c) Draw a point "C" on the PPC that lies along the same CIC as point A. Label this

CIC

0

.

d) Now the FSE opens to international trade. Start a new graph for part d) to avoid some clutter; be

sure to label point B on your graph. Assume that FSE has a comparative advantage in producing

diamonds. Label a point "D" on your graph showing where the country would produce. Show exports

and imports on your graph along with a new

CIC

curve for utility after trade.

e) How would you determine the real price of autos if trade is allowed given your graph above?

f) If 300 diamonds are exported and 2500 autos are imported and the price of an auto is $1,000, then

what is the price of a diamond?

g) If the GDP for this country is $9,300,000 then find the value for the index of openness based on the

trade described in part f).

h) You were told in part d) which good the FSE has a comparative advantage in. How could you tell this

using the HO model and the graph you just drew?