1. a. Refer to the figure above. Albania refused to engage in international trade for ideological reasons. To maximize its economic welfare it would choose to produce at which point in the diagram above?
b. The Cold War is over, and Albania is interested in obtaining gains from trade. The world relative price is PA/PB 2. As a result, Albania would choose to produce at which point (a, b, or c)? (Hint: recall production decisions in standard trade model depend on the relative price.) Given this additional information, in which good does Albania enjoy a comparative advantage?
2) Refer to the figure above. Now, suppose that the relative price of A is actually not higher than Albania's autarkic level of PA/PB I, but PA/PB -0.5. Would Albania still be able to gain from trade? If so, where would be its production point? Given the information in this question, where is Albania's comparative advantage?
