3. Excercise | |

Given data | Production possibility frontiers, MRT, utility function, MRS, resource supplies and international prices are as follows: PPF: y MRT = y Utility: U = x MRS = x
Prices: p* |

A. Autarky problem | Find y |

B. Optimal production under free trade | Given international prices, p*1,
p*2, find optimal output, y_{1}, y_{2}, and I^{o}
(maximized income) evaluated at world prices. |

F. Optimal consumption under free trade | Find, x_{1}, x_{2},
U^{F}, z_{1} (= x_{1} - y_{1} = export,
if negative) and z_{2} (x_{2}-y_{2}= import, if
positive). |

G. Gains from trade | Evaluate the gains from trade, G
= U^{F} - U^{A}. |

S. Sketch | Sketch the solutions and carefully label points A, B, and F. This concludes the math portion of the course. |

No more math from now on. |

Mauritz
Escher, Amalfi coast