Assume that the following are production possibilities for two hypothetical coun

Question

Assume that the following are production possibilities for two hypothetical countries:

Redstone

   A B C D E

steel (tons): 60 45 30 15 0

wheat (tons): 0 15 30 45 60

Bluestone

   A B C D E

steel (tons): 20 15 10 5 0

wheat (tons): 0 15 30 45 60

1) What is the domestic opportunity cost of producing steel in each country?

Redstone:

Bluestone:

2) What is the domestic opportunity cost of producing wheat is each country?

Redstone:

Bluestone:

3) Should Redstone and Bluestone trade with each other? If yes, Which good would each recieve in the trade?

4) Suppose that trade is now opened with the terms of trade of 1Steel=2Wheat. Plot the "trading possibilities curve" for each country when 1Steel=2Wheat.

5)Suppose that trade is now opened with the terms of trade of 1Steel=1Wheat. Plot the "trading possibilities curve" for each country when 1Steel=1Wheat.

6) If the terms of trade are 1Steel=1Wheat, will Redstone engage in trade? Why or why not (be specific)?

Explanation / Answer

Good times doing these. Nice review for me.

1.) Redstone - 60 wheat Bluestone - 60 wheat

2.) Redstone - 60 steel Bluestone - 20 steel

3.) Redstone and Bluestone should trade. Both can benefit and save each other a lot of time. Bluestone would be trading wheat for Redstone's steel. Redstone could trade 15 tons of steel for 30 tons of wheat. Redstone now has 45 tons of steel, and 30 tons of wheat. Now each has two resources in a shorter amount of time, and Bluestone would have 15 tons of steel and 30 tons of wheat.

4.) I can't really graph this out for you on here, I don't think Chegg has a graphing function for answering questions. The production possibilities curve is just a graphical representation showing various maximum ombintains of output a nation can produced with limited resources in a fixed time period.

Just make a graph label the left side units of steel, and the bottom part units of wheat. 1 steel = 2 wheat. Redstone would also benefit from this.

60 tons of steel = 120 tons of wheat

You can also use y=mx+b. Most of the time you can just draw it out and that is good enough for most instructors.

5.) This one its going to be pretty even. 60 steel = 60 wheat. You'll set the graph up the same way as you did on question 4.

6.) No. There is no incentive and Redstone does not benefit from trading if 1 steel = 1 wheat. The question doesn't mention a time frame so time cannot be factored into it when it is 1 unit for 1 unit. Redstone has the same oppurtunity costs either way.

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