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4. Art Farmer lives in Fredonia which is an endowment economy. Art has an endowment of...

4. Art Farmer lives in Fredonia which is an endowment economy. Art has an endowment of Qc units of clothing and QF units of food. Briefly explain your answers.

a. Use an indifference curve and budget line to show Art as a net seller of food in Fredonia prior to the opening to trade with the rest of the world. On your diagram indicate Art’s endowment, consumption, welfare and the relative price of clothing. Briefly explain your diagram.

b. When Fredonia opens to trade, the price of food falls and Art is worse off. Show this on your diagram, and indicate the new price, point of consumption, and level of welfare for Art. Briefly explain your diagram.

c. Describe a compensation scheme which would ensure that no one in Fredonia is made worse off from the move to free trade. Show on your diagram how this compensation scheme will affect Art Farmer. Indicate Art’s endowment, consumption, indifference curve, and his net trade (i.e., is he a net seller of food or clothing after the compensation scheme is put into effect?)

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