I. Comprehensive questions. (80 points) 1. With regard to figure l a. What would
ID: 1119473 • Letter: I
Question
I. Comprehensive questions. (80 points) 1. With regard to figure l a. What would be the equilibrium-relative commodity price of wheat if Dw(US+ UK) shifted up by 2/3 in the left panel of figure 1? How much wheat and cloth would the US and UK then produce? b. What happen to the equilibrium point E in left panel when Dw(US+UK) shifted down by 1/3? c What does the answer to part(a) imply for De(UK +US) in the right panel of figure 1? ( 515/5 and I5 points in total ) figure 1 Pw/PC Pe/Pw Sc(us+UK) 180 24O 20 180 240 Wheet ClothExplanation / Answer
Answer :- If there is a upward shift in DW(US+UK), there will also be an increase in the equilibrium relative commodity price by 1/3 to Pw/Pc = 4/3.
As there will still be an intersection between the higher DW(US+UK) and the vertical part of Sw(US+UK) curves, the United Stated will continue to have complete specialization in the wheat production and it will produce an output of 180W on the other hand, the UK will still have the specialization in the cloth production and it will produce a quantity equal to 120C.
Answer:- As the equilibrium relative commodity price of the cloth has a inverse relationship with relative commodity price of wheat , if here is an increase of 4/3 in the later, there will be a decline in the former by ¾. This will result in the downward shift of 1/3 of DC(US+UK) in the figure