Answered: Draw a PPF for each country. (b) Which…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Problem 1. This problem is based on the Ricardian Model. Assume that 2 countries, Gryffindor and Slytherin, use troll labor to produce 2 goods, magic wands and chocolate frogs.

(a) In Slytherin, 1 troll can produce 6 magic wands or 10 chocolate frogs, while in Gryffindor the production of 1 magic wand requires 2 trolls and the production of 1 chocolate frog requires 1 troll. Assume that there are 10 trolls in Slytherin and 20 trolls in Gryffindor. Draw a PPF for each country.

(b) Which country has a comparative advantage in magic wands and why?

(c) What is the possible maximum relative price of a magic wand in the trade equilibrium? What is its possible minimum price?

Definition Video Definition Ability of a country to produce goods and services at a lower opportunity cost compared to other countries. Here, opportunity cost refers to the forgone units of one good in order to produce one more unit of another good. For example, the opportunity cost of producing good X in country A is 2Y and in country B is 1.25Y. Country B has a lower opportunity cost of producing good X than country A. Therefore, country B has a comparative advantage in the production of good X. Video

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