Indifference Curves

Question 1

Optimal IC relative to BC

Answer 1

Tangent to BC

Question 2

What does CIC stand for?

Answer 2

Community indifference curves

Question 3

Assumptions made for CIC?

Why is it the case?

Why is it slightly inaccurate?

Answer 3

Treat whole country like a single person (convenience)

As a result : Aggregate consumption depends on prices, national income and consumer preferences

Countries don’t experience utility and make consumption choices - People do!

Question 4

Assumption about income and preferences of consumers?

Answer 4

All consumers have the identical, homothetic preferences and income.

Question 5

Difference in CIC assumptions for HOS relative to RM?

Answer 5

HOS allows for unequal distribution of national income.

Question 6

What does a higher CIC mean for RM and HOS?

Answer 6

RM : Gains from trade are always positive and benefits the entire country.

Country becomes fully efficient with specialisation.

HOS : Gains from trade positive overall, but there are winners and losers.
- Owners of the abundant factor win, as higher demand leads to higher wage for labour or rent for capital.