chpt1lect.doc

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Department
Economics for Management Studies
Course
MGEC62H3
Professor
Garth Frazer
Semester
Fall

Description
Diagram 2 Suppose that another large country offers to trade with us at price Pw. Our country will trade to reach the highest indifference curve possible where the indifference curve is TANGENT to the new line - there is only one of these points. How do we trade? We export ED hockey sticks and import D1C1 tuques Trade triangle is ED,C Legs of triangle are exports and imports and the hypothenuse is the price ratio Exercise: draw flatter price line Algebraic catch up Maximize utilitiy U(eh,ct) Subject to a constrained (budget line) - Get to the highest indifference curve possible - Budget line: value of goods consumed = value of endowment - ( Ph)Ch + (Pt)Ct = (Ph)eh + (Pt)et = I - Ptct - Ptet = pheh-phch - pt(ct-et) = ph(eh-ch) - ct-et = ph/pt (
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