Murray ECO 310 - The production possibilities of two countries

Quiz 3 (Based on chapter 6) - Due – (to be announced in class or via email and Canvas)
Name________________________________, M# _________________
Name________________________________, M# _________________
Instructions: You are advised but not obligated to work with one other person. Submit only one
solution if you decide to work with one other person.
The production possibilities of two countries, Shirtland’s and Chipland, are given by the
following tables (millions of shirts and chips produced per day). Assume that resources both are
fully employed and homogeneous in both countries.
Shirtland Possibilities
Point
r
h
s
t Shirts
108
54
24
0 Chips
0
18
28
36 Chipland Possibilities
Point
b
c
d Shirts
120
60
0 Chips
0
60
120 1. (5 points) what are the tradeoffs for each nation in autarkic (no trade) situation? 2. (15 points) Carefully draw the production possibilities for both countries using the
numbers and points indicated in the tables. Note: you need to use the SAME axis for
both countries for each good! 3. (5 points) Is there an opportunity for a mutually beneficial trade here? If so, which
country has a comparative advantage (and hence specialize) in which product? 4. (15 points) A nation that decides to specialize and trade will not be limited to the options
shown by its own pre-trade PP curve. That is, the trading or consumption possibilities
curve, which shows the combination of the two goods consumed will be different after
trade and specialization (compared to autarkic situation.) Draw 1) the production
possibilities curve for each country; 2) the consumption possibilities curves for each
country; and 3) locate the final production point for each country. [Note: Even though it
is possible to do so, you don’t have to use any numerical figures here- as shown in class
(lecture)]. 5. (15 points) using the autarkic graphs you drew in question #2 and 4, complete the
following statements with numbers: If Chipland starts at point c and decides to produce
10 more chips, it will produce _____________ shirts. If Shirtland produces only 10 chips,
it will produce ____________ shirts. Note: No credit without show your work
(calculation)! 6. (5 points) Using the graphs you drew in #4 (trading or consumption PP), answer the
following question. In these graphs, suppose the nations agree to exchange one shirt for
each chip. Will the consumption possibilities curve for Chipland still be above its
productions possibilities? Will trade take place? Why or why not? 7. (10 points) What are the upper and the lower bounds for trade price of shirts or chips
(Hint: up to how many shirts is _______ willing to pay for a chip? Up to how many chips
is _______ willing to pay for a shirt?) 8. (15 points) Suppose these countries agreed to exchange two shirts per chip (after
specialization, which you have figured out above). Now (using this information) draw the
trading and/or consumption possibilities curves for both countries (along the autarkic
possibilities) and show the possible combinations of consumption for each country. How
do the outcomes with specialization and trade compare to the autarkic outcomes? . [Note:
Even though it is possible to do so, you don’t have to use any numerical figures here- as
shown in class (lecture)]. 9. (15 points- this question would show me if you indeed understood the practical and
important implications of this exercise!) What happens to employment? (Hint! Look at
in which industry did production increased and in which industry did production didn’t
increase in each country.) Based on this exercise, what can you say about free trade? Who
benefited and who lost as a result of free trade? So, is free trade beneficial to everyone?
Are nations better off with free trade or otherwise? Now think about these two old adages
saying as: (1) “Where you stand on an issue depends where you sit.” (2) Economic
restructuring may be inevitable.” Using the conclusions of this same quiz evaluate these
last two statements.