Use the graph below to answer this question

| February 25, 2017

Question
1. Use the graph below to answer this question:

a. What could have caused a consumer’s budget line to shift from ML to MN?

b. What is the difference between the quantity of goods X and Y consumed at point A vs. point B?

c. Explain using the concepts of income and substitution effects why the quantities of goods X and Y changed when going from point A to point B.

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2. Suppose that France and Germany both produce schnitzel and wine. The following table shows combinations of the goods that each country can produce in a day.

a. Who has a comparative advantage in producing wine? Who has a comparative advantage in producing schnitzel?

b. Suppose that France is currently producing 1 bottle of wine and 6 pounds of schnitzel, and Germany is currently producing 3 bottles of wine and 6 pounds of schnitzel. Demonstrate that France and Germany can both be better off if they specialize in producing only one good and then engage in trade.

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