ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN: 9780190931919
Author: NEWNAN
Publisher: Oxford University Press
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The U.S produces two goods.
Micro Lectures (M)
and Ice Cream (I)
It does so using the function
8M^2 + 2I^2 = 500
Citizens feel that
U(M,I) = 10M^0.5I^0.5
Find trade equilibrium using world prices when Pm=2 & Pi =4
Which good is imported and how much of it?
Expert Solution
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Step 1
US produces on the PPF
The citizens utility is given by,
World prices are given by Pm=2 and Pi=4.
First we find the tangential point between the PPF and the price line. The slope of the price line is given by
The slope of the PPF is calculated by,
Equating the slopes,
Plugging that in the PPF equation,
Now that we know that US budget constraint passes through we find the equation of the budget constraint as
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