Principles of Macroeconomics
Principles of Macroeconomics
13th Edition
ISBN: 9780135196915
Author: Karl E. Case; Ray C. Fair; Sharon E. Oster
Publisher: Pearson Education (US)
Question
Book Icon
Chapter 18, Problem 2.1P

Subpart (a):

To determine

The production possibility frontier.

Subpart (a):

Expert Solution
Check Mark

Explanation of Solution

The production possibility frontier for country Latvia is given in figure 1 as follows:

Principles of Macroeconomics, Chapter 18, Problem 2.1P , additional homework tip  1

From figure 1, it can be inferred that if all the resources are employed in the production of tractors then, at most 75,000 tractors can be produced and if all resources are employed in the production of Bobsleds then. 225,000 bobsleds can be produced.

The production possibility frontier for country Estonia is given in figure 2 as follows:

Principles of Macroeconomics, Chapter 18, Problem 2.1P , additional homework tip  2

From figure 2, it can be inferred that if all the resources are employed in the production of tractors then, at most 37,500 tractors can be produced and if all resources are employed in the production of Bobsleds then. 75,000 bobsleds can be produced.

Economics Concept Introduction

Concept Introduction:

Production possibilities frontier: It is a graph that shows the combinations of output that the economy can possibly produce the given available factors of production and the available production technology.

Subpart (b):

To determine

The opportunity cost, comparative advantage, and trade.

Subpart (b):

Expert Solution
Check Mark

Explanation of Solution

The opportunity cost of producing Tractors for Latvia (OCLT) can be calculated as follows:

OCLT=Output per worker in LatviaBobsledsOutput per worker in LatviaTractor=225,00075,000=3 Bobsleds

Thus, the opportunity cost for Latvia to produce one tractor is 3 bobsleds.

The opportunity cost of producing Tractors for Estonia (OCET) can be calculated as follows:

OCET=Output per worker in EstoniaBobsledsOutput per worker in EstoniaTractor=75,00037,500=2 Bobsleds

Thus, the opportunity cost for Estonia to produce one tractor is 2 bobsleds.

Since Estonia incurs a lower opportunity cost in the production of tractors then, Estonia has a comparative advantage in tractor production than Latvia.

The opportunity cost of producing Bobsleds for Latvia (OCLB) can be calculated as follows:

OCLB=Output per worker in LatviaTractorOutput per worker in LatviaBobsleds=75,000225,000=13 Tractors

Thus, the opportunity cost for Latvia to produce one bobsled is 1/3 tractors.

The opportunity cost of producing Bobsleds for Estonia (OCEB) can be calculated as follows:

OCEB=Output per worker in LatviaTractorOutput per worker in LatviaBobsleds=37,50075,000=12 Tractors

Thus, the opportunity cost for Estonia to produce one bobsled is 1/2 tractors.

Since Latvia incurs a lower opportunity cost in the production of bobsleds then, Latvia has a comparative advantage in bobsleds production than Estonia.

Since both have comparative advantages, they will definitely engage in the trade.

Economics Concept Introduction

Concept Introduction:

Opportunity cost: The opportunity cost refers to the value of what one has to give up in order to choose another alternative.

Comparative advantage: It is the ability of a producer, firm or country to produce a good or service at a lower opportunity cost of production than the competitors.

Subpart (c):

To determine

The agreement of exchange.

Subpart (c):

Expert Solution
Check Mark

Explanation of Solution

If a trade’s agreement is negotiated, any agreement between 2 bobsleds and 3 bobsleds per tractor will benefit both countries’ trade and specialization.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!
Students have asked these similar questions
Problem 2. If the consumer preference can be represented by a CES function with δ = 0.5, i.e. u(x, y) = x0.5 + y0.5. Let the prices and income be (px, py, w).  1. Set up the Lagrangian expression.2. Take the first-order conditions.3. Substitute into budget constraint to derive the optimal consumption bundles.
1. A town relies on four different sources for its non-drinking water needs: dam water, reclaimed water, rain water, and desalinated water. The different sources carry different risks and costs. For instance, desalinated water is fully reliable due to abundant sea water, but it is more expensive than other options. Reclaimed water also has relatively lower risk than rain or dam water since a certain amount can be obtained, even during the dry. season, by the treatment of daily generated waste water. Using any of the four options requires an investment in that resource. The return on a particular water source is defined as the amount of water generated by the source per dollar of investment in it. The expected returns and standard deviations of those returns for the four water sources are described in the following table: Water resource Expected return St. Deviation Dam water 2.7481 0.2732 Reclaimed water 1.6005 0.0330 Rain water 0.5477 0.2865 Desalinated water 0.3277 0.0000 Higher…
1. Imagine a society that produces military goods and consumer goods, which we'll call "guns" and "butter." a. Draw a production possibilities frontier for guns and butter. Using the concept of opportunity cost, explain why it most likely has a bowed-out shape. b. Show a point that is impossible for the economy to achieve. Show a point that is feasible but inefficient. c. Imagine that the society has two political parties, called the Hawks (who want a strong military) and the Doves (who want a smaller military). Show a point on your production possibilities frontier that the Hawks might choose and a point the Doves might choose. d. Imagine that an aggressive neighboring country reduces the size of its military. As a result, both the Hawks and the Doves reduce their desired production of guns by the same amount. Which party would get the bigger "peace dividend," measured by the increase in butter production? Explain.
Knowledge Booster
Background pattern image
Similar questions
SEE MORE QUESTIONS
Recommended textbooks for you
Text book image
ENGR.ECONOMIC ANALYSIS
Economics
ISBN:9780190931919
Author:NEWNAN
Publisher:Oxford University Press
Text book image
Principles of Economics (12th Edition)
Economics
ISBN:9780134078779
Author:Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:PEARSON
Text book image
Engineering Economy (17th Edition)
Economics
ISBN:9780134870069
Author:William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:PEARSON
Text book image
Principles of Economics (MindTap Course List)
Economics
ISBN:9781305585126
Author:N. Gregory Mankiw
Publisher:Cengage Learning
Text book image
Managerial Economics: A Problem Solving Approach
Economics
ISBN:9781337106665
Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:Cengage Learning
Text book image
Managerial Economics & Business Strategy (Mcgraw-...
Economics
ISBN:9781259290619
Author:Michael Baye, Jeff Prince
Publisher:McGraw-Hill Education