Question

2. Consider three countries, which have consumers with different preferences, but are otherwise the same. Suppose all 80 consumers in each of the three countries want to buy one unit of either Good A or Good B or Good C, see Tables 1, 2 and 3 below. (Goods A, B, and C are similar to each other, but not the same. Firms produce units of each good according to consumer wants and willingness to buy.)

Table 1: Consumer Preferences Country 1

	Will buy only Good A	Will buy only Good B	Will buy only Good C	Want the good that is most popular among Country 1 consumers that will buy only one type
Country 1	30 consumers	10 consumers	10 consumers	30 consumers

Table 2: Consumer Preferences Country 2

	Will buy only Good A	Will buy only Good B	Will buy only Good C	Want the good that is most popular among Country 2 consumers that will buy only one type
Country 2	10 consumers	30 consumers	10 consumers	30 consumers

Table 3: Consumer Preferences Country 3

	Will buy only Good A	Will buy only Good B	Will buy only Good C	Want the good that is most popular among Country 3 consumers that will buy only one type
Country 3	10 consumers	10 consumers	30 consumers	30 consumers

The production of Goods A, B, and C all have the same average cost table, see Table 4. All firms charge a price equal to their average opportunity cost per unit.

Table 4: Production Costs, All Producers of Goods A, B, and C

Quantity Produced of the Good	Average Opportunity Cost per Unit = Price per Unit
10	$43
20	$38
30	$34
40	$30
50	$27
60	$24
70	$22
80	$20

We’ll examine outcomes for Country 1. (Countries 2 and 3 will have analogous outcomes.)

(a) The No Trade Case. In Country 1, Firm Ace produces Good A, Firm Blue produces Good B, and Firm Crow produces Good C. (There is no other production.)

     (i) In Country 1, how many units of Good A are produced and consumed? Of Good B? Of Good C?

     (ii) In Country 1, what is the price of Good A? Of Good B? Of Good C?

(b) The With Trade Case. In Country 1, Firm Ace produces Good A. In Country 2, Firm Brown produces Good B. And in Country 3, Firm Cheetah produces Good C. (There is no other production.) There is trade of the goods between the countries.

     (i) What does Country 1 import and what does it produce and export?

          What does Country 2 import and what does it produce and export?

          What does County 3 import and what does it produce and export?

     (ii) In Country 1, how many units of which goods are produced?

           In Country 2, how many units of which goods are produced?

           In Country 3, how many units of which goods are produced?

     (iii) In Country 1, how many units of Good A are consumed? Of Good B? Of Good C?

     (iv) In Country 1, what is the price of Good A? Of Good B? Of Good C?

(c) Comparing the No Trade Case to the With Trade Case.

For Country 1, in which case do consumers get the lowest average price?

(This average price is across all 80 consumers in the country).

Answer 1

Answer: