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2. a. The home country is endowed with QF units of food and QC units of...

2. a. The home country is endowed with QF units of food and QC units of clothing. Use an indifference curve diagram to show this economy freely trading such that they export clothing and import food. On your diagram, indicate the endowment and consumption points as well as exports and imports, and the world relative price. Note: Only show the free trade equilibrium in part a. Do not show the autarky equilibrium.

b. On your diagram, show what would happen if fire destroyed 10 percent of its clothing endowment. Assume the home country is small on world markets. Show the new endowment, the new point of consumption, the new level of welfare, and the new level of exports and imports. Has the volume of trade risen or fallen as a result of the fire? Explain. Assume food and clothing are both normal goods in your answer. (Recall that by definition, demand for a normal good rises as income rises.)

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