Question

7. Working with Numbers and Graphs Q9 The following table summarizes the combinations of goods X and Y that two individuals, Tina and David, can each produce individually. Tina David X Y X Y 150 0 200 0 75 37.5 100 10 0 75 0 20 would specialize in the If each person specializes in the production of the good for which they have the comparative advantage, then would specialize in the production of good X. (Hint: Calculate the opportunity cost of producing X and Y for each production of good Y, and individual.) Suppose that David and Tina each specializes in the production of the good in which each has a comparative advantage. Fill in the top row of the following table to indicate David's and Tina's output of each good. David Tina X Y X Y Before Trade, with Specialization After Trade After specialization, suppose the two agree on price 8 units of good X for each unit of good Y. When the two individuals make the trade, they After specialization, suppose the two agree on a price of 8 units of good X for each unit of good Y. When the two individuals make the trade, they exchange 80 units of good X for 10 units of good Y. Recall that the individual who has specialized in the production of X would trade 80 units of good X and receive 10 units of good Y, while the individual who specialized in the production of good Y would trade 10 units of good Y and receive 80 units of good X. In the previous table, fill in the second row to indicate the amounts of good X and good Y each individual has after the trade. The following graphs plot Tina's production possibilities frontier (PPF) in purple and David's PPF in blue, respectively. Using the second row of the previous table, plot Tina's new combination of X and Y with the grey point (star symbol) ? Tina 90 81 Tina after Trade 72 63 54 45 36 27 18 Tina's PPF 0 Using the second row of the previous table, plot David's new combination of X and Y with the tan point (dash symbol). ? David 40 38 David after Trade 32 28 24 David's PPF 20 16 12 4 0 0 24 48 72 98 120 144 168 192 216 240 X True or False: This combination of X and Y was already attainable to these individuals before the trade. True False

Answer 1

Soluton Gren value are: Dauid Tina 200 C 00 Caloslations (15150Y X = 0-ry y ax Opportun ty Gostof I x is 65y and ly is ax Sinslorly

David: Ix =20 Y (20 16X fpotunity Cost of 1x it o-ly nd ly is loX. Cost of rodscing Since ofpertunity 1s produ ced by Davíd. in the preduchion SoDavid has aomparatie. advontage 1) ofx and Tiha ho Comporatve pdvantage in the productn I each person pecial' ser in dte Prduction ot k god foY ahich thoy have -the omparatve adwantege, then ould specialise in the productron of qood y, Tina woulspecialite the prduotrn of goox David and

3 Ta ble: Betore trade Ccorth Specialisation st 7s-10 65 co-80= 1a0 g0 Affer Erade Gran after spectlitatsn : Price= 80nit of d x for each unit-afgood y Exchonge 8 Umit of-od x for lounittogody then Individal uho has specialised In produetron of x woold trade go units of goad x and Teceve Tndividal coho Specialed inpoduatron ofgoody would trade lounitk of good y and eceve go uniti f good

4 Graphs: LI20 to) Tina 6 David ACler trade: Oavid 36 32 28 Davfds PPF 20 12 4 192 216 246 120 144168 8 Tna 2 (80,6) 63 45 36 Go ohl

This Combinatron txand y aleady ateinabe to asas ete mdiuido aly before de trade TRUE Before trade persa Can CanSume on y bund le hich lieg Þelow or on fPF