Question

Imagine an economy where consumers always buy goods in rigid proportions---for example, one yard of cloth for every pound of food---regardless of the prices of the two goods. Continue to assume that the PPF is the usual one, being concave towards the origin.

(a) Use a diagram of the PPF and indifference curves to show whether an improvement in the terms of trade benefits this economy just like in the more general case with substitution between goods for the consumers.

(b) How does the RD curve for this country look like? How about the RS curve?

Answer 1

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