In the trade scenario in problem 1, due to overfishing, Norway becomes unable to catch the quantity of fish that it could in previous years. This change causes both a reduction in the potential...

In the trade scenario in problem 1, due to overfishing, Norway becomes unable to catch the quantity of fish that it could in previous years. This change causes both a reduction in the potential quantity of fish that can be produced in Norway and an increase in the relative world price for fish,


_f
/

_a
.

a. Show how the overfishing problem can result in a decline in welfare for Norway.

b. Also show how it is possible that the overfishing problem could result in an increase in welfare for Norway.

problem 1

Suppose Indonesia and China are trading partners. Indonesia initially exports palm oil to and imports lubricants from China. Using the standard trade model, explain how an increase in the relative price of palm oil—in relation to lubricant prices—would affect production and consumption of palm oil for Indonesia (assuming that the taste for both goods is the same in both countries). If the income effect of price change of palm oil is greater than the substitution effect, what would happen to palm oil consumption in Indonesia?