Question

2. Consider a country with Leontief preferences such that food consumption is always equal to two times clothing consumption. The country's production possibility frontier (PPF) is described by QF-200-2Qc, where QF and Qc are production of food and clothing and where Qp> 0 and Qc>0 (i.e production cannot be negative) a. What is the pretrade relative price of clothing, pe? Explain. b. Derive algebraically the solution for pretrade consumption of food and clothing the point of production and consumption and the associated utility curve d. The world relative price of clothing, 3. On your diagram from part c: (i) Show the points of production and consumption after the country opens to trade and show the associated utility curve. Briefly Explain. (ii) Derive the solution for food and clothing consumption algebraically.

Answer 1

a] Given that Leontieff preference: U(F.C) = Min [F, 2C] at equilibrium F = 2C, PPF: q_F = 200 - 2Q_C pre trade relative price of C, P_c/P_F = equal to slope of PPF, (when cison x-axis) So, P_c/P_F = 2 b] solution at equilibrium F = 2c from PPF: 2Q_c = 200 - 2Q_c 4Q_c = 200, Q^d_c = 200/4 = 50. \r\n d] (P_c/P_F) = 3, Now after opening to trade rightarrow at equilibrium F = 2c, So consumption & production points are unchanged, Bw_2 PPF is linear and consumer preference are loeonitieff. F^alpha = 100 & Q*_c = 50, with (P_c/P_F)^w = 3.