a) Plot the production possibilities frontier (PPF) for both countries (use two separate graphs). Carefully label the axes and indicate the intersection points of PPFs with the axes. Explain how are these intersection points connected with the production and exports bias of both countries?
b) Suppose that consumers in Japan and Norway have similar tastes and use the demand diagonal curves to illustrate the fact that they consume both goods in the same proportion. Indicate in the graph the production and consumption points in autarky and draw the relative price curves in both countries.
c) Imagine that both countries open up to trade. Draw the relative price of both goods in the trading equilibrium. Indicate in a new graph the production and consumption points and trade triangles when Japan and Norway are engaged in free trade.
d) Suppose that an oil field is discovered in the Sea of Japan. Draw the PPF after the start of oil production in Japan. How oil extraction in Japan would affect the trade patterns and the price of mining and quarrying product relative to the price of motor vehicles if Japan and Norway continue to trade with each other as before.
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Japan
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Norway
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Mining and quarrying
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0.006
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6.729
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Motor vehicles manufacturing
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2.393
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0.097
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