Trade Problem Set 30 1-1




1. Consider two farmers, one with an endowment of 5 pounds of peaches, the other with an endowment of five pounds of cherries. Suppose these two farmers meet daily and make a mutually agreeable exchange of 2 pounds of peaches for 3 pounds of cherries.

a. Write down an expression for the terms of trade. Explain how the terms of trade relates to the dollar prices of the two goods.

Consider the following shocks (or changes). Explain how each of these shocks may influence the terms of trade between the farmers. Assume that each farmer's sole interest is to maximize her own utility.

b. The cherry farmer arrives at the market with 5 extra pounds of cherries.

c. The peach farmer has just finished reading a book titled "How to Influence People."

d. Damp weather causes mold to grow on 40% of the peaches.

e. News reports indicate that cherry consumption can reduce the risk of cancer.

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Last Updated on 7/4/00