1. In the analysis of an exchange between two people, suppose both people have identical preferences. Will the contract curve be a straight line? Explain. Can you think of a counterexample?
2. Give an example of conditions when the production possibilities frontier might not be concave.
a. A monopsonist buys labor for less than the competi- tive wage. What type of inefficiency will this use of monopsony power cause? How would your answerWhich country has a comparative advantage in the production of each good? Explain.
b. Determine the production possibilities curve for each country, both graphically and algebraically. (Label the pretrade production point PT and the post-trade point P.)
c. Given that 36 pounds of cheese and 9 bottles of wine are traded, label the post-trade consumption point C.
d. Prove that both countries have gained from trade.
e. What is the slope of the price line at which trade occurs?