Question

The following table summarizes the combinations of goods X and Y that two individuals, Tina and David, can each produce individually. Tina X Y 1000 50 5 0 10 David XY 1500 75 37.5 0 75 fesch person specializes in the production of the good for which they have the comparative advantage, then would specialize in the production of good Y, and would specialize in the production of good X. (Hint: Calculate the opportunity cost of producing X and Y for each individual.) Suppose that David and Tina ach specializes in the production of the good in which each has a comparative advantage.

Answer 1

For Tina, to produce 1 X , give up = 5/50 = .1Y

For David, to produce 1 X, give up = 37.5/75 = 1/2 Y

=.5Y

So lower opportunity cost of production of X in terms of Y, for Tina

So Tina has Comparative ADVANTAGE in X

David has CA in Y

1) david will specialize in Y

2) Tina will specialize in X

Table

	X tina	Y tina	X david	Y David
Before	100	0	0	75
After	10	10	90	65

1Y = 9X

So tina will trade 90 X for 10Y

Tina 30 27 Tina after Trade 24 21 18 > 15 (10,10) 12 Tina's PPF 12 24 2 4 0 a 4 e 10 120

David %3D 81 David's PPF David afler Trade 72 (90,65) 54 30 27 18 21 0 7 100 128 180 175 200 22 20

True/false

true

for both , new Consumption point lies outside the PPF