Question: The country of Puglia produces and consumes two products, pasta(P) and togas(T), with increasing marginal opportunity costs of producing more of either product. With no international trade the relative price of pasta is 4 T/P.
a. Show Puglia's economy, using a graph with a production-possibility curve and community indifference curves.
b. Puglia now opens to international trade. With free trade the world relative price of pasta is 3 T/P. Which product will Puglia export? Which product will it import? On the same graph that you used for part a, show the free-trade equilibrium for Puglia.
c. Use your graph to explain whether or not Puglia gains from free trade.