Problem
1. Indicate the equilibrium production and consumption point in autarky, using a PPF and a community indifference curve under increasing-opportunity-cost conditions. Why is this an equilibrium? What must occur for this country to gain from trade?
2. Assume that a country produces and consumes two goods, cloth and machines, and is in equilibrium in autarky. It now finds that it can trade at international prices where (Pcloth / Pmachines) on the world market is greater than (Pcloth / Pmachines) in the domestic market. Should it trade? If so, what commodity should it export? Why? Will it gain from trade? How do you know?