Chapter 19, Problem 1P

(a)

To determine

The production possibility frontier.

Explanation of Solution

The production possibility frontier for country Germany and France is shown below figure 1.

In figure 1, the vertical axis of both figure measures production of guns and horizontal axis measures production of butter. Left-hand side of the figure is the PPF of the Germany and right hand side of the figure is the PPF of France.

Economics 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.

(b)

To determine

The opportunity cost, comparative advantage, and trade.

Explanation of Solution

The opportunity cost (OC) of producing guns for Germany can be calculated as follows:

$\begin{array}{c}\text{OC}=\frac{{\text{Output per worker in Germany}}_{\text{Butter}}}{{\text{Output per worker inGermany }}_{\text{Gun}}}\\ =\frac{200,000}{100,000}\\ =2\text{ Pounds of butter}\end{array}$

Thus, the opportunity cost for Germany to produce one gun is 2 pounds of butter.

The opportunity cost of producing guns for France can be calculated as follows:

$\begin{array}{c}\text{OC}=\frac{{\text{Output per worker in France}}_{\text{Butter}}}{{\text{Output per worker in France}}_{\text{Gun}}}\\ =\frac{75,000}{50,000}\\ =1.5\text{ Pounds of butter}\end{array}$

Thus, the opportunity cost for France to produce one gun is 1.5 pounds of butter.

The opportunity cost of producing Butter for Germany can be calculated as follows:

$\begin{array}{c}\text{OC}=\frac{{\text{Output per worker in Germany}}_{\text{Gun}}}{{\text{Output per worker in Germany }}_{\text{Butter}}}\\ =\frac{100,000}{200,000}\\ =0.5\text{ Guns}\end{array}$

Thus, the opportunity cost for Germany to produce one pound of butter is 0.5 guns.

The opportunity cost of producing Butter for France can be calculated as follows:

$\begin{array}{c}\text{OC}=\frac{{\text{Output per worker in France}}_{\text{Gun}}}{{\text{Output per worker in France}}_{\text{Butter}}}\\ =\frac{50,000}{75,000}\\ =0.66\text{ Gun}\end{array}$

Thus, the opportunity cost for France to produce one pound of butter is 0.66 guns.

France has a comparative advantage in guns and Germany has a comparative advantage in the production of butter. Thus they will engage in trade.

Economics 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.

(c)

To determine

The agreement of exchange.

Explanation of Solution

If a trade’s agreement is negotiated, any agreement between 1.5 pound of butter and 2 of butter per gun will benefit both countries’ trade and specialization.