The two main agricultural products of Colombia are coffee and bananas. They can be produced using labor and land. Land with specific characteristics can be used to produce coffee[1] (Uribe-Castro, 2020) but not bananas, and some land can be used to produce bananas but not coffee. Assume that labor is freely mobile across sectors in Colombia, and the amount of each type of land is fixed. Markets are perfectly competitive.

a.Use a PPF and a well-behaved indifference curve to depict the autarky equilibrium in Colombia. What is the relationship between opportunity costs and relative prices at this point, and why?

b.Suppose Colombia opens to trade with Dominican Republic. Dominican Republic has a higher autarky relative price in coffee. Show the effect of trade on production in the diagram from part a. How does the opportunity cost of producing coffee change in Colombia under free trade? How does this relate to whether the country specializes completely or not?

c.Label consumption under trade in the diagram from part b. How has the relative quantity of coffee to bananas consumed in the country changed with trade and why? How have real wages in terms of each good changed and why?

d.Suppose terms of trade deteriorate in Colombia due to changes in the rest of the world's demand for coffee. Show the effects of this change in the diagram from part c in a diagram. How has aggregate welfare in Colombia changed? Why?

e.Describe the effect of the change in part d on the welfare of labor and owners of coffee land and banana land in Colombia, using real wages and real rental rates.