Question

2. Consumption possibilities based on comparative advantage When a country specializes in the production of a good, this means that it can produce this good at a lower opportunity cost than its trading partner. Because of this comparative advantage, both countries benefit when they specialize and trade with each other. The following graphs show the production possibilities frontiers (PPFs) for Freedonia and Lamponia. Both countries produce grain and sugar, each initially (i.e., before specialization and trade) producing 18 million pounds of grain and 9 million pounds of sugar, as indicated by the grey stars marked with the letter A. Freedonia Lamponia SUGAR (Millions of pounds) SUGAR (Millions of pounds) PPF 0 + 6 0 42 48 0 6 42 48 12 18 24 30 36 GRAIN (Millions of pounds) 12 18 24 30 36 GRAIN (Millions of pounds)

Answer 1

Blanks-

1) Grain

2) Sugar

3) 36

4) 36

Freedonia Consumption After Trade SUGAR (Millions of pounds) 0 + 0 + 6 42 48 12 18 24 30 36 GRAIN (Millions of pounds)

-False

Lamponia Consumption After Trade PPF SUGAR (Millions of pounds) 0 6 42 48 12 18 24 30 36 GRAIN (Millions of pounds)