Autarky
Suppose H has
units of Labour. It requires 
units of labour to produce 1 unit of X and 
for 1 unit of Y. Then the
maximum units of X
that H can produce is
/ (when Y=0), and the maximum units of Y
that H can produce is / (when
X=0).
H's production possibility frontier is linear due to the assumption of CRS.
At any point on this PPF,
.X + .Y =
The slope
/
gives the "opportunity cost":
whenever H produces 1 more unit of X, H has to give up / units of
Y (because H has a limited amount of resources, ).
Equilibrium in Autarky
H will produce (X,Y) to maximise its utility.|
Points E and F give I"H level of utility. If H produces more X (and less Y) from E (i.e. move to G) or produces more Y (and less X) from F (i.e. move to H), H's utility increases from I"H to I'H. At I'H, H can improve utility further by moving toward C.
At C, H has maximised its utility given |
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Foreign Country | |
By the same logic, F's PPF can be constructed as:
|
and F's Autarky Equilibrium is where the slope of the indifference curve is the same as the slope of
its PPF:
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