The US produces and consumes two products, pasta (P) and togas (T), with increasing opportunity

costs of producing more of either product. With no international trade the relative price of pasta is 4

T/P, and the US produces and consumes 10 million units of pasta and 4 million units of togas.

a. Show the before-trade equilibrium for the US using a graph with a production-possibility curve,

indifference curve and price line. Clearly label the axes, curves/lines, production point and

consumption point.

b. The US now opens to international trade. With free trade the world relative price of pasta is 3 T/P.

The US produces 6 million units of pasta and 8 million units of togas, and consumes 12 million units of

pasta and 3 million units of togas. Which product will the US export? Which product will it import?

How many units? Show the after-trade equilibrium for the US using your graph in part (a) or on a

separate graph. Clearly label the axes, curves/lines, production point and consumption point.

c. Draw the US domestic demand and supply curves for pasta using all the information above. Clearly

label the axes, curves/lines, prices and quantities for pasta. Assume that consumers in the US shift their

tastes in favor of pasta. How would this affect the US domestic demand and/or supply curve(s)?