Question

Good X Country 1 Country 2 150 Good X 120 90 95 80 72 с А ICY 62 60 c IC 50 o IC 30 35 E 18 33 45 55 60 78 Good Y Good Y 30 60 90 120 150 Use the figure above to answer the following question: How much does Country 2 import and export? Imports 27 and exports 60 Imports 37 and exports 37 Imports 60 and exports 60 O Imports 23 and exports 60

Answer 1

Here we have given the PPF of “county2” the initial production and consumption point is “C”, where PPF, IC, and the relative price create the tangency condition. Now, as the relative price increases the production point should move to point “F” where PPF and new relative price create the tangency condition, and the new consumption point is above the point “C”, where IC2’ and new relative price create the tangency. So, the level of export should be “150-60 = 90 units” and import should be “95 units”.

Here this possibility is not given in the question, => most appropriate production point is “E” where “good Y=120” and “good X=35”, => corresponding level of export is “120-60 = 60 units” and import is “95-35 = 60 units”. So, the most appropriate answer is “c”.