Consider an economy which produces two goods, x and y. The production possibilities curve is...

Question:

Consider an economy which produces two goods, x and y. The production possibilities curve is given by {eq}4x^2 + y^2 = 500 {/eq} .

The economy is open, i.e., its prices are determined by world markets where Px = Py = 1. The utility function describing the tastes of consumers is given by {eq}U = x^{0.5} y^{0.5} {/eq}.

Will the country import or export good x? Also, determine the answer graphically.

Autarky and Terms of Trade:

In economics, autarky refers to a closed economy equilibrium where countries do not engage in trade. Allocations in autarky are useful for determining the patters of trade once countries open up for trade. Specifically, countries will be exporting goods that it can produce at a relatively low price and imports goods that it can produce at a relatively high price in autarky.

Answer and Explanation: 1

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We can first compute the allocation in autarky, given the country's production possibility frontier and preferences. Specifically, the optimal...

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Comparative Advantage, Specialization & Exchange

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Chapter 57 / Lesson 3
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A comparative advantages is the ability to produce goods at a lower cost than an opponent. Learn how this relates to absolute advantages and leads to specialization of production and exchange of the surplus products.


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