a) Suppose in autarchy that Midland and Zeeland have the following price ratios
ID: 1212364 • Letter: A
Question
a) Suppose in autarchy that Midland and Zeeland have the following price ratios for Chicken (C) and Noodles (N). Midland: PC/PN=4/1 Zeeland: PC/PN=1/2. b) What is the range of relative prices for which Zeeland willingly specializes in and exports Chicken? c) What is the range of relative prices for which Midland willingly specializes in and exports Noodles? d) What is the range or prices for which both a) and b) is true? e) Assume a relative price within the range given in d) and graphically show each of the following for Midland. i) Autarchy equilibrium. Label it A. ii) The production point after trade. Label it P. iii) The consumption point after trade. Label it C. iv) Exports. Show the distance. v) Imports. Show the distance. vi) Gains from trade.
Explanation / Answer
Midland: PC/PN=4/1
PC = 4PN
In this country, producers will maximize their profit by selling more chicken as the price of chicken is four times the price of noodles.
Therefore, it will export chicken between the range of PN/2 to 4PN
Zeeland: PC/PN=1/2.
PC = PN/2
In this country, producers will maximize their profit by selling more NOODLES as the price of noodles is two times the price of noodles.
Therefore, it will export noodles between the price range of PC/4 TO PC/2
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