Consider country A that has two types of consumers, a farmer (F) and an engineer (E), and two types of goods x, and xg where x, is an agricultural commodity and x; is an electronic good. The utility functions are as follows: and their endowments are given by (20,0) and (0, 10) respectively. Find the equilibrium price for the agricultural good in country A. Answer: Now consider country B that has also has two types of consumers, a farmer (F) and an engineer (E), and two types of goods x, and x, where x, is an agricultural commodity and x, is an electronic good. The utility functions are as follows: # af, xf ) = In xf +In zf and their endowments are given by (50,0) and (0, 20) respectively. Find the equilibrium price for the agricultural good in country B. Answer: Now if the two countries start trading with each other what would be the equilibrium price for the agricultural good. [Hint: think about the total demand and total endowment across two countries, both countries will face the same price.] Answer: After trade opens, which of the following statement is true. Select one: a. Insufficient information b. Farmer in neither country is better off c. Farmer in both countries are better off d. Only the farmer in country A is better off e. Only the farmer in country B is better off

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter12: The Partial Equilibrium Competitive Model

Section: Chapter Questions

Problem 12.3P

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Question

Consider country A that has two types of consumers, a farmer (F) and an engineer (E), and two types of goods x, and xg where x, is an agricultural commodity and x; is an electronic good. The utility functions are as
follows:
and their endowments are given by (20,0) and (0, 10) respectively. Find the equilibrium price for the agricultural good in country A.
Answer:
Now consider country B that has also has two types of consumers, a farmer (F) and an engineer (E), and two types of goods x, and x, where x, is an agricultural commodity and x, is an electronic good. The utility functions
are as follows:
# af, xf ) = In xf +In zf
and their endowments are given by (50,0) and (0, 20) respectively. Find the equilibrium price for the agricultural good in country B.
Answer:
Now if the two countries start trading with each other what would be the equilibrium price for the agricultural good. [Hint: think about the total demand and total endowment across two countries, both countries will face
the same price.]
Answer:
After trade opens, which of the following statement is true.
Select one:
a. Insufficient information
b. Farmer in neither country is better off
c. Farmer in both countries are better off
d. Only the farmer in country A is better off
e. Only the farmer in country B is better off

Expert Solution

Step 1

Farmer optimal demand of good x1 and x2:

Equating MRS to price ratio

$M R S = \frac{M U x 1}{M U x 2} = \frac{\frac{1}{2 x 1}}{\frac{1}{2 x 2}} = \frac{x 2}{x 1}$

$\frac{x 2}{x 1} = \frac{p 1}{p 2} x 2 = x 1 \frac{p 1}{p 2}$

substituting the value in budget constraint:

$p 1 * x 1 + p 2 * x 2 = M p 1 * x 1 + p 2 * x 1 * \frac{p 1}{p 2} = 20 p 1$

x1* = 10

$x 2 = 10 * \frac{p 1}{p 2}$

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