Question

production possibilities frontier

from Abbreviale in graphs C for cheese and F for furnitur North Carolina is famous for its furniture, if necessary. and if it produced only e sets. Show your work! while Wisconsin for its cheese. Both NC and WI can produce both, If NC devoted all of its resources to the production of furniture, it could produce 20 furniture sets, cheese it could make 10 wheels of cheese. If WI devoted all of its resources to the n of furniture, it could produce 12 furniture sets per year, and if it produced only cheese then it could mak e 12 wheels of cheese. Suppose that currently states do not specialize, NC produces 4 wheels of cheese and 12 furniture sets, while WI produces 6 wheels of cheese and 6 furniture sets. a) Sketch a production possibilities frontier for NC, with cheese on the vertical axis. Indicate state's current production point on the PPF. What is the slope of the PPP? What is the opportunity cost of one furniture set for NC? Sketch a production possibilities frontier for WI (cheese on the vertical axis). Indicate state's current production point on the PPF. What is the slope of the PPF? What is the opportunity cost of a furniture set for WI? b) Which state has an absolute advantage in producing furniture? c) Which state has a comparative advantage in producing furniture? What is the total output of cheese and furniture when states don't specialize? Does it increase when states specialize? What are the total gains(in terms of increased joint output) from specialization in cheese and in furniture? d) e) Assume that the states figured out its most beneficial area for specialization and produce accordingly. wheels of cheese and 8 sets of furniture. Plot the desired consumption levels in the PPF graphs above, labeling as "desired consumption levels" What amounts of goods will be brought and exchanged at the market by the specializing states if they want to achieve the desired consumption levels? What will be the exchange ratio of cheese to furniture? 0 g) What are the individual states' gains from specialization and trade? How does specialization and trade affect states' levels of consumption?

Answer 1

a).

Consider the given problem here “NC” can either produce “20 furniture” or “10 wheels of cheese”. So, the PPF of “NC” is given below.

A1 10 4 B1 20 12

So, here “A1B1” be the PPF of NC. Now, the vertical and the horizontal intercepts are given by “10” and “20” respectively, => the slope of the PPF is given by “dC/dF = (-10/20) = (-1/2)”. So, the opportunity cost of one furniture is “0.5 wheels of cheese”.

Now “WI” can either produce “12 furniture” or “12 wheels of cheese”. So, the PPF of “WI” is given below.

12 A2 6 82 6 12

So, here “A2B2” be the PPF of WI. Now, the vertical and the horizontal intercepts are given by “12” and “12” respectively, => the slope of the PPF is given by “dC/dF = (-12/12) = (-1)”. So, the opportunity cost of one furniture is “1 wheels of cheese”.

b).

Now, “NC” can produce maximum of “20 furniture” and “WI” can produce maximum of “12 furniture”, => “NC” has the absolute advantage in the production of “furniture”. Similarly, “NC” can produce maximum of “10 wheels of cheese” and “WI” can produce maximum of “12 wheels of cheese”, => “WI” has the absolute advantage in the production of “Wheels of cheese”.

c).

Now, the opportunity cost of producing “furniture” is “0.5” for “NC” and “1” for “WI”, => “NC” has lower opportunity cost of producing furniture, => “NC” has the comparative advantage in the production of “furniture” and “WI” has the comparative advantage in the production of “Cheese”.

d).

So, “NC” is producing “4 wheels of cheese” and “12 furniture”. Similarly, “WI” is producing “6 units of both goods”, => the total production of “cheese” is “4+6 = 10 units” and the total production of furniture is “12+6 = 18 units”.

Now, under the complete specialization “NC” will produce only “20 furniture” and “WI” will produce only “12 cheese”. So, here we can see that the production of both the goods increases by “2 units”. So, here the total gain is “2 units of cheese and 2 units of furniture”.