In evaluating the efficiency gain of international trade, we are concerned about the entire country or community, and thus encounter a more complicated situation with several individuals making up the entire country. Answer these questions (provide graphs if you want):
What is meant by the community indifference curve?
The community indifference curve shows the various combinations of two commodities which yield the same level of satisfaction or utility to a community or nation. It is intended to represent the preferences of a country as a whole and is a convenient tool for deriving quantities of trade in a two-good model. The slope of a curve at any point gives the marginal rate of substitution or the amount of a commodity which a nation is willing to give up to obtain an additional unit of another commodity. The community indifference curve can also be used to show how international trade increases community welfare.
Can these curves intersect one another? Show.
Yes. Community indifference curves can intersect because the indifference map of a country is linked to a particular income distribution within that country. If the income distribution is different, then there is a different community indifference map, and the curves of the new map may intersect those of the previous map. This is usually what happens when a country opens up or expands trade.
What are assumptions that one needs to make in order to come up with non-intersecting community indifference curves?
Non-intersecting community indifference curves are supposed to exist if both of the following assumptions are met:
The utility functions for the individuals are homogenous and;
Either (a) the utility functions are identical or (b) the distribution of income is fixed.
Draw plausible shapes of the production possibility frontier, and briefly discuss the factors contributing to their shapes.
The shape of the production possibility frontier (PPF) of a country depends on: (1) its factor endowments and (2) the production functions of the various commodities. The plausible shapes of the production possibility frontier include:
Suppose there are constant returns to scale in both industries and only one factor, then the production possibility frontier is a straight line. If the opportunity cost is constant as production of different goods is changing, then a linear PPF is produced.
Concave (towards origin)
Suppose there is diseconomies of scale or decreasing returns to scale. Under full utilization of resources, the production possibility frontier is concave towards the origin. This shape is basically due to the differences in optimal factor intensities between industries. If a country faces increasing opportunity costs or marginal rate of transformation (MRT) in producing more units of a commodity, then this is shown by a PPF that is concave. The country will produce where the MRT is equal to the equilibrium relative commodity...