Question

When a country has a comparative advantage in the production of a good, it means that it can produce this good at a lower opportunity cost that trading partner. Then the country will specialize in the production of this good and trade it for other goods. The following graphs show the production possibilities frontiers (PPFS) for Freedonia and Sylvania. Both countries produce lemons and tea, each initially (i.e., before specialization and trade) producing 24 million pounds of lemons and 12 million pounds of tea, as indicated by the grey stars marked with the letter A. Freedonia Sylvania TEA (Millions of pounds) TEA (Millions of pounds) 0 8 64 0 8 58 64 16 24 32 40 48 56 LEMONS (Milions of pounds) 16 24 40 48 LEMONS (Millions of pounds) Freedonia has a comparative advantage in the production of while Sylvania has a comparative advantage in the production of Suppose that Freedonia and Sylvania specialize in the production of the goods in which each has a comparative advantage. After specialization, the two countries can produce a total of million pounds of tea and million pounds of lemons. Suppose that Freedonia and Sylvania agree to trade. Each country focuses its resources on producing only the good in which it has a comparative advantage. The countries decide to exchange 24 million pounds of lemons for 24 million pounds of tea. This ratio of goods is known as the price of trade between Freedonia and Sylvania. The following graph shows the same PPF for Freedonia as before, as well as its initial consumption at point A. Place a black point (plus symbol) on the graph to indicate Freedonia's consumption after trade. Note: Dashed drop lines will automatically extend to both axes.

Answer 1

Blanks - Tea, lemons , 48, 48 -24=24 After tea, 2 24 trade and tee. , Freedonia consumes 24 Lemo Sylvania consund 24 do 48-26=24 lemons. Sylvania Free dowia 25 + - ------- Tone