Question

. Consider an economy that can produce two goods, apples and blue jeans. Each worker can produce 3 units of apples or 4 units of blue jeans per week. Suppose that when this economy is opened to trade, the price of apples is $10 per unit and the price of blue jeans is also $10 per unit. Suppose as well that each consumer spends one quarter of his/her income on blue jeans, and that there are 1 million workers in this economy. a. Construct the budget line for a typical worker in this economy. Explain how you arrived at the value of intersection with each axis. b. What does this economy export under trade, and how much does it export of it?

Answer 1

ATTACHED GRAPH

It export jeans. it will export 3/4 of their production and keep the 1/4 for internal use.

1,000,000 jeans consumed --3,000,000 exported--

3,000,000 apples imported

Step-by-step explanation:

The economy will export the good with the lower opportunity cost:

do 3 apple cost 4 jeas with a cost of $10 each total = 40

do 4 jean cost 3 apples with a cost of $10 each total = 30

The economy will focus in jeans and export to later purchase apple in the market.

Therefore will produce 4 jeans and sale them all to get 4 apple (X-axis intersection)

Or will produce 4 jeas and keep them (Y-Axis intersection)

That is produce 4 jeans x 1,000,000 worker = 4,000,000

And then, consume 1/4 = 1,000,000

and export the rest 3,000,000