Equating pA? with pA* we find that
1 + c(v — 1) + cv
b? = —-----;-----r-----
1 + c(v — 1) + v
Figure 2 shows the autarky price as a function of the budget. Notice
that if b ~≥ ⅜ (1 + c) the size of the budget constraint under autarky is not
binding.

c
2 + c ( v -1)
1 + c ( v -1) + cv
1 + c ( v -1) + v
1(1 + c ) b
Figure 4: Autaky Price Function
5 Trade
Suppose that the small economy trades with the rest of the world at the
world price p* and that the government does not adjust its education policy.
14
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