Answered: Freedonia Lamponia 16 16 14 14 12 12…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

When a country has a comparative advantage in the production of a good, it means that it can produce this good at a lower opportunity cost than its trading partner. Then the country will specialize in the production of this good and trade it for other goods.

The following graphs show the production possibilities frontiers (PPFs) for Freedonia and Lamponia. Both countries produce potatoes and tea, each initially (i.e., before specialization and trade) producing 6 million pounds of potatoes and 3 million pounds of tea, as indicated by the grey stars marked with the letter A.

Suppose that Freedonia and Lamponia agree to trade. Each country focuses its resources on producing only the good in which it has a comparative advantage. The countries decide to exchange 2 million pounds of potatoes for 2 million pounds of tea. This ratio of goods is known as the price of trade between Freedonia and Lamponia.

The following graph shows the same PPF for Freedonia as before, as well as its initial consumption at point A. Place a black point (plus symbol) on the graph to indicate Freedonia's consumption after trade.

Note: Dashed drop lines will automatically extend to both axes.

Freedonia
Lamponia
16
16
14
14
12
12
PPF
10
10
8
8
PPF
4
2
2
+
4
8
10
12
14
16
2
4
8
10
12
14
16
POTATOES (Millions of pounds)
POTATOES (Millions of pounds)
Freedonia has a comparative advantage in the production of
while Lamponia has a comparative advantage in the
production of
Suppose that Freedonia and Lamponia specialize in the production of the goods in which each has a
comparative advantage. After specialization, the two countries can produce a total of
million pounds of potatoes and
million pounds of
tea.
TEA (Millions of pounds)
TEA (Millions of pounds)

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