Assignment #1
1. Assume that there are only two countries in the world, Pacifica and Atlantica. Both
countries produce and consume surfboards. The pre-trade price of surfboards in
Atlantica is lower than the pre-trade price of surfboards in Pacifica. Draw a three-
graph diagram to depict the Pacifica, Atlantica, and international markets for
surfboards illustrating the pre-trade price difference. Now assume that free trade
opens up between Pacifica and Atlantica. Depict a plausible world price in the
graphs. What happens to overall economic welfare in the two countries? Be sure to
label and refer to the graphs in your answer.
