Assume a world consists of only two countries: Latvia and Bulgaria, which can produce only two goods: lemons and beef. Latvia can produce 1000 tons of lemons or 500 tons of beef or any linear combination of lemons and beef that satisfies lemons+2×beef=1000. Bulgaria can produce 750 tons of lemons or 500 tons of beef or any linear combination of lemons and beef that satisfies lemons+1.5×beef=750. Countries can freely trade with each other.
1) Assume the prices are $325/ton for lemons and $500/ton for beef). What will happen (increase, decrease, does not change, or “the information is not sufficient to answer this question”) to the world production of lemons if the price of beef increases to $510/ton
2) If people in both countries eat the same dish that requires equal amounts of lemons and beef, which country (Latvia, Bulgaria, both, or neither) benefits from trade?
3) If people in both countries eat the same dish that requires equal amounts of lemons and beef, how much beef will be produced in Latvia?