(Budget Line: 10 points) Refer to the following graph to answer the following qu
ID: 1146742 • Letter: #
Question
(Budget Line: 10 points) Refer to the following graph to answer the following questions.
Production and Consumption in the Country H
The figure above gives H's international trading pattern. Point P is production with trade, and point C is consumption with trade.
Which product does H export? How many units? Which does it import? How many units?
What is the price ratio of Chemicals/Clothing?
Given the production level and prices, what is the maximum level of consumption possible in H of Chemicals? Of Clothing?
Assuming the H country is maximizing its welfare (utility), the Marginal Rate of Substitution when it consumes 40 units of chemicals is ___.
Clothing 60 20 40 60 ChemicalsExplanation / Answer
Given that the point P is the production point while the point C is the consumption point. Between these two combinations we see that the country is producing 60 units of chemicals but is consuming only 40 of them. Therefore it exports chemicals. It is producing only 20 units of clothing but it is consuming its 60 units which means it is importing clothing. Exports are 20 units of chemicals and imports are 40 units of clothes.
The cost of 1 unit of chemical is a two unit of cloth. Hence, the price ratio is 0.5 between Chemicals and cloth. This country can produce a maximum of 60 units of chemicals which implies that maximum of 60 units of chemicals can be consumed. Similarly if it produces 60 units of chemicals but trades all of it against clothing then it will be consuming 120 units of clothing. Than it will be consuming a maximum 120 units of clothing.
If the marginal rate of substitution at the consumption point is Equal to the price ratio of the budget line then the marginal rate of substitution will be equal to 0.5.
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