Consider and economy with two consumers, Jeff and Jay, and producing two goods, wine and cheese.
a. Illustrate using an Edge worth Box diagram and a production possibilities frontier together, both efficiency in exchange and efficiency in production. Identify on your figure the point of efficient production and consumption. What are the economic conditions satisfied at this point?
b. Using your same diagram, consider opening this economy to international trade. Suppose that this economy has a comparative advantage in the production of cheese. Illustrate how this economy gains from trade. Identify on your graph domestic consumption, production, exports and imports.