You are given the following Production Possibility Frontier (PPF): X2+ Y = 1728 Suppose that the society's utility function is given by: U=XY where X and Y are two commodities. (a) Derive the point on the PPF that maximises utility. Calculate the utility associated with this combination. (b) Assume the economy is now opened to international trade. X and Y are traded on the basis of one unit of Y for every unit of X [Hint: (Xp – X.) = (Yc- Yp), where Xp and Yp are the respective amounts of goods X and Y produced while Xc and Yc are the respective amounts of goods X and Y consumed]. Write down the constrained maximization problem and solve for optimal production, trade, and consumption. (c) Show that utility has increased with international trade.

You are given the following Production Possibility Frontier (PPF): X2+ Y = 1728 Suppose that the society's utility function is given by: U=XY where X and Y are two commodities. (a) Derive the point on the PPF that maximises utility. Calculate the utility associated with this combination. (b) Assume the economy is now opened to international trade. X and Y are traded on the basis of one unit of Y for every unit of X [Hint: (Xp – X.) = (Yc- Yp), where Xp and Yp are the respective amounts of goods X and Y produced while Xc and Yc are the respective amounts of goods X and Y consumed]. Write down the constrained maximization problem and solve for optimal production, trade, and consumption. (c) Show that utility has increased with international trade.

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter13: General Equilibrium And Welfare

Section: Chapter Questions

Problem 13.1P

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