Describe and label substitution effect and income effect

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Q. Peru's production possibilities frontier is graphed below. QT a. When compared to its main trading partner, Peru has a lower opportunity cost of coffee. Depict a trade equilibrium consistent with these set of assumptions. What is pattern of trade between Peru and its main trading partner? Suppose world relative price of textiles (PT/PC) increases. What happens to Peru's terms of trade? Explain. What happens to terms of trade for Peru's main trading partner? Explain. Depict a new trade equilibrium for Peru resulting from terms of trade change. What happens to relative production of coffee (QC/QT) in Peru? What happens to relative demand for coffee (QdC/QdT) in Peru? Describe and label substitution effect and income effect. How has welfare of representative consumer in Peru changed with increasing world relative prices? Suppose, instead, world relative price of coffee (PC/PT) had increased.

Reference no: EM1369374

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