1. Country G can produce 500 cabbages or 100 bananas. Country K can produce 50 c
ID: 1135907 • Letter: 1
Question
1. Country G can produce 500 cabbages or 100 bananas. Country K can produce 50 cabbages or 30 bananas. Which of the following statements must be true? I. At any price of trade that country K is willing to accept, that trade will make country G worse off since G can produce more of both goods than country K. II. Production of 250 cabbages and 50 bananas is either inside or on the PPF for country G III. If bananas are being measured on the x-axis and (15,40) is on the PPF for country K, then the MRT at (15,40) cannot be steeper than -8/3 a) None of them must be true b) Only I must be true c) Only I and Il must be true d) Only I and IIl must be true e) Only Il and III must be trueExplanation / Answer
Option I is false. The two countries will trade based on their comparative advantage, and the absolute advantage ( i.e. country G can produce more of both goods than country K, so country G has absolute advantage in both productions) has nothing to do with their gains from trade. Only if the price of trade that country K is willing to accept is greater than the country G's opportunity cost in the production of the good that country K exports, then country G will be worse off.
Option II is True, because country G can either produce 500 cabbages or 100 bananas. 250 cabbages (which is half of G's production if it uses all resources in cabbages production) and 50 bananas(which is half of G's banana production if it uses all resources in banana production) will lie on the PPF and it's the midpoint of the PPF for country G.
Statement III is also true because if bananas are being measured on the X-axis and (15,40) is on the PPF, then MRT at that point can't be steeper than -(40/15) = -(8/3)
Answer-option E
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