Assume that the world economy consists of two countries: Bangladeshia and Kiribatia. Both countries are trying to protect their low-lying islands from disappearing under rising water and production in both countries is limited to rice and fish. If r denotes production of rice and f denotes production of fish, then f +3r = 30 is Production Possibilities Curve (PPC) in Kiribatia, and 4f +3r = 60 is the PPC in Bangladeshia.

1) Which country benefits from trade if in the equilibrium the ratio of prices is pr/pf=2/3 a) Neither

b) Kiribatia only

c) Bangadeshia only

d) Both

e) Can not be determined

2) Assume that countries can freely trade with each other. How many tons of fish is produced by Kiribatia if the current total world production of fish is 15 tons?

a) 20

b) 15

c) 5

d) 0

e) Can not be determined

3) Assume that countries can freely trade with each other and currently are in equilibrium in which the price of fish is $10/ton and the price of rice is $30/ton. If the equilibrium price of rice suddenly drops to $5/ton, what will happen to the world production of rice?

a) It will increase

b) It will decrease

c) It will not change

d) There is not enough information to answer this question

4) Assume that the two countries can freely trade with each other, utility functions of people in both countries are identical, and everybody consumes a single dish consisting of 50% fish and 50% rice. How much fish will be produced in Bangladeshia?

5) Assume that the two countries can freely trade with each other, utility functions of people in both countries are identical, and everybody consumes a single dish consisting of 50% fish and 50% rice. How much fish will be consumed in Bangladeshia?

Answer rating: 100% (QA)

1 Ratio of Prices and Comparative Advantage Analysis The ratio of prices prpf 23 indicates that rice is relatively cheaper in Kiribatia compared to fi... View the full answer