International Trade

[Dr. Strange]

http://discussion-forum.2150183.n2.nabble.com/file/n7578285/June20_Trade.png

For the above problem Sir gave the following answer: Can anyone explain how he got the second part answer.Thanks in advance.

[Arya]

Sir please help.

[samuraijack]

I am getting the same answer by using joint production possibilities and equating MRT to MRS.

[Akash]

L_1A=10, L_2A=20
L_1B=20 L_2B=50
So B should produce solely 1 (20,0) and A will produce a combination (x_1,x_2) and demand (x_1d,x_2d)

U=x_1d*x_2d
MRS= -(x_2d/x_1d)
MRT=-1/2

for equilibrium MRS=MRT=price ratio (p)
So p= 1/2

Now for CD utility;
x_1d=m/2p and x_2=m/2 ; where m=p*x_1+x_2

y1_d=10 and y_d=5 (because we know their endowment and demand and prices)

Satisfy demand/supply equations for 1 and 2 each
We get (x_1,x_2)=(2,11) and (x_1d,x_2d)=(12,6)

[Dr. Strange]

Thanks a lot guys. It  was very helpful.