Microeconomics production possibilities frontier?

Question

The only two countries in the world, Alpha and Omega, face the following production possibilities frontiers.

Alpha produces 150 units of popcorn (y intercept) and 250 units of peanuts (x intercept) while omega produces 300 units of popcorn (y intercept) and 100 units of peanuts (x intercept).

a. Assume that each country decides to use half of its resources in the production of each

good. Show these points on the graphs for each country as point A.

b. If these countries choose not to trade, what would be the total world production of popcorn and peanuts?

c. Now suppose that each country decides to specialize in the good in which each has a comparative advantage. By specializing, what is the total world production of each

product now?

d. If each country decides to trade 100 units of popcorn for 100 units of peanuts, show on the graphs the gain each country would receive from trade. Label these points B.

Answer 1

Alpha produces 150 units of popcorn (y intercept) and 250 units of peanuts (x intercept) while omega produces 300 units of popcorn (y intercept) and 100 units of peanuts (x intercept).

a. Assume that each country decides to use half of its resources in the production of eachgood. Show these points on the graphs for each country as point A.

Join the points (x=0,y-150) and (x=250,y=0) you get the straight line PPF for Alpha country. Similarly, join the points (x=300,y=0) and (x=100, y=0), the resulting straight line is the PPF for Omega country.

In the Graph for Alpha: point A will be the combination x=125,y=75.

For Omega country, point will be combination x=50,y=150.

b. If these countries choose not to trade, what would be the total world production of popcorn and peanuts?

If they do not choose to trade, their outputs will bedecided by the demand for the two products at various prices. The solution is the point at which the price line is tangential to the PPP curve.

However, if you are meaning the countries are to use half of their resources to each product, then the solution is already given in answer to a above.

c. Now suppose that each country decides to specialize in the good in which each has a comparative advantage. By specializing, what is the total world production of each

product now?

Alpha is required to give up 3 units of popcorn to get 5 units of peanuts, while Omega has to give up 3 units of popcorn to get i unit of peanut in the respective domestic market. So,  Alpha is more productive in peanut production. It should specialise in peanut where it has comparative advantage. Corresponding, Omega country will produce only popcorn because it has to give up only an unit of peanut to produce 3 units of popcorn, while Alpha would have to give up 5 units of peanut to produce 3 units of popcorn. With this specialisation, the World output will be 250 peanuts (all produced by Alpha) and 300 units of popcorn (all produced by Omega).

d. If each country decides to trade 100 units of popcorn for 100 units of peanuts, show on the graphs the gain each country would receive from trade. Label these points B.

Since Omega gives up 100 units of popcorn to get 100 units of peanut, it will have 200 units of popcorn and 100 units of peanuts to consume.

Correspodingly, Alpha will have 150 units of peanuts and 100 units of popcorn.

The gain is clear: if Alpha had to produce 150 peanuts locally, it would have no resources to produce any popcorn. So, the net gain is 100 units of popcorn. This point is shown as B for Alpha at (x=150, y=100).

For Omega, if it had produced 200 units of popcorn , it would have had produced only33.33 units of peanuts. With trade it gets 66.66 units of peanut more besides 200 units of popcorn. It consumption point after trade would be point B at (x=100, y=200).

Yahoo answers do not have facility to show all these graphically. So this is what I can do for you.