Question
For a season, farmers in Phu Quoc village could choose to grow and harvest either 12 bags of chili or 4 bags of pepper, while
For a season, farmers in Phu Quoc village could choose to grow and harvest either 12 bags of chili or 4 bags of pepper, while farmers in Guntur village could produce 10 bags of chili or 2 bags of pepper. a. What is each commodity's relative price (opportunity cost) within each village before trading? (3pt) b. Which village has an absolute/comparative advantage in producing which goods? (4pt) c. Who should export chili, and who should export pepper? (2pt) d. Graph out the Possible Production Frontier (PPF) for both villages before the trade, assuming that there is a constant return to scale. (2pt) e. What are the mutually beneficial terms of trade range? Show your work. (5pt) f. Graph out the Possible Production Frontier (PPF) for both villages after trade and point out the gain from trade, given that the term of trade is 4 bags of chili for 1 bag of pepper. (3pt) g. Some people notice the discomfort caused by excessive pepper consumption, so they are spreading rumors that pepper could cause heartburn! The demand and price for pepper drops as a result. Now, one pepper bag can only be exchanged for 2 bags of chili. Despite this, the villages continued to trade. How much is each village gain/loss from trade? (4pt) h. The rumors were later debunked, and the demand for chili returned to normal. But now Guntur is suffering a drought, which reduces its pepper output to 8 bags per season. Is trade still possible? Has the relative price of pepper depreciated or appreciated due to the event?
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