Please help with this question: Part 3
Part 3: A few years later a railroad is built in Illinois, which allows the two farmers to meet andtrade between them. a. Jones suggests that they meet on the first Monday after the harvest and explore thefollowing potential trades. i. Jones trades 100 pounds corn for 100 pounds watermelons ii. Jones trades 200 pounds watermelons for 200 pounds corn iii. Jones trades 100 pounds watermelons for 75 pounds corn iv. Jones trades 300 pounds watermelons for 100 pounds corn a1. Which of these trades are beneficial for Jones? Which are beneficial for Smith? a2. Are any of the trades Pareto-improving? a3. Are any of the Pareto-improving trades also Pareto-efficient? a4. Which trade is most likely to go through? To answer these questions, draw an Edgeworth box with Jones in the SW corner and Smith in the NE corner; watermelons on the horizontal axis and corn on the vertical axis. Mark the pre-trade allocation of watermelons and corn, corresponding to the amounts that Jones and Smith produce in 1 and 2 above. Draw the two farmers 'indifference curves that correspond to the pre-trade allocation. Mark the potential post-trade allocations suggested in i.-iv. above and evaluate their position with respect to the twoindifference curves. b. Encouraged by the initial success of their meeting and trade, farmers agree to meet next year trade at the ratio of 4 pounds of watermelons for 3 pounds of corn, Pw/Pc =0.75. Each will make their optimal production decisions based on this price ratio i. How much will Jones produce of each good, (W3pI;C3pI) ? What bundle would Jones want to consume, (W3CJ;C3CJ) ? Show on the graph that with trade at PCPW=0.75 Jones can get a better consumption bundle than w/o trade, as in 1 above. ii. How much will Smith produce of each good, (W3pS;C3pS) ? What bundle would Smith want to consume, (W3CS;C3S) ? Show on the graph that with trade at PCPW=0.75. iii. Explain why the price ratio PCPW=0.75 does not lead to an equilibrium tradebetween farmers. e. Jones reads an op-ed in a newspaper by a French economics professor Leon Walrus who advocates the advantages of free trade. Jones decides to write him a letter and ask for help in figuring out the optimal terms of trade between him and Smith. Prof. Walrus makes the calculations and suggests that next year they try to trade at the ratio of 2 pounds of watermelon for 1 pound of corn, Pw/PC=0.5. i. How much will Jones produce of each good, (W4p;C4p) ? What bundle would Jones want to consume, (W4C;C4C) ? Show on the graph that with trade at PCPW=0.5 Jones can get a better consumption bundle than w/o trade, as in 1 above. ii. How much will Smith produce of each good, (W4pS;C4PS) ? What bundle would Smith want to consume, (W4C;S;C4S) ? Show on the graph that with trade at PCPW=0.5 Smith can get a better consumption bundle than w/o trade, as in 2 above. iii. Explain, why the price ratio PCPW=0.5 leads to a general equilibrium: acting independently, Jones and Smith make production and consumption decisions that areconsistent with each other. Part 3: A few years later a railroad is built in Illinois, which allows the two farmers to meet andtrade between them. a. Jones suggests that they meet on the first Monday after the harvest and explore thefollowing potential trades. i. Jones trades 100 pounds corn for 100 pounds watermelons ii. Jones trades 200 pounds watermelons for 200 pounds corn iii. Jones trades 100 pounds watermelons for 75 pounds corn iv. Jones trades 300 pounds watermelons for 100 pounds corn a1. Which of these trades are beneficial for Jones? Which are beneficial for Smith? a2. Are any of the trades Pareto-improving? a3. Are any of the Pareto-improving trades also Pareto-efficient? a4. Which trade is most likely to go through? To answer these questions, draw an Edgeworth box with Jones in the SW corner and Smith in the NE corner; watermelons on the horizontal axis and corn on the vertical axis. Mark the pre-trade allocation of watermelons and corn, corresponding to the amounts that Jones and Smith produce in 1 and 2 above. Draw the two farmers 'indifference curves that correspond to the pre-trade allocation. Mark the potential post-trade allocations suggested in i.-iv. above and evaluate their position with respect to the twoindifference curves. b. Encouraged by the initial success of their meeting and trade, farmers agree to meet next year trade at the ratio of 4 pounds of watermelons for 3 pounds of corn, Pw/Pc =0.75. Each will make their optimal production decisions based on this price ratio i. How much will Jones produce of each good, (W3pI;C3pI) ? What bundle would Jones want to consume, (W3CJ;C3CJ) ? Show on the graph that with trade at PCPW=0.75 Jones can get a better consumption bundle than w/o trade, as in 1 above. ii. How much will Smith produce of each good, (W3pS;C3pS) ? What bundle would Smith want to consume, (W3CS;C3S) ? Show on the graph that with trade at PCPW=0.75. iii. Explain why the price ratio PCPW=0.75 does not lead to an equilibrium tradebetween farmers. e. Jones reads an op-ed in a newspaper by a French economics professor Leon Walrus who advocates the advantages of free trade. Jones decides to write him a letter and ask for help in figuring out the optimal terms of trade between him and Smith. Prof. Walrus makes the calculations and suggests that next year they try to trade at the ratio of 2 pounds of watermelon for 1 pound of corn, Pw/PC=0.5. i. How much will Jones produce of each good, (W4p;C4p) ? What bundle would Jones want to consume, (W4C;C4C) ? Show on the graph that with trade at PCPW=0.5 Jones can get a better consumption bundle than w/o trade, as in 1 above. ii. How much will Smith produce of each good, (W4pS;C4PS) ? What bundle would Smith want to consume, (W4C;S;C4S) ? Show on the graph that with trade at PCPW=0.5 Smith can get a better consumption bundle than w/o trade, as in 2 above. iii. Explain, why the price ratio PCPW=0.5 leads to a general equilibrium: acting independently, Jones and Smith make production and consumption decisions that areconsistent with each other