Question of the Day: Day Three

1. With each comment below, point out whether that comment is true or false. For each false comment, explain why that particular comment is false.

a. points inside the PPC are only achievable if PPC shifts inward

b. points outside the PPC are only achievable if the PPC shifts outward

c. changes in how factors are utilized will shift the PPC


2. Assume that Country Z and Country W each have 200 units of labor, 100 units of capital, and 120 units of land available within their country to use in the production of goods X1 and X2. Their production possibilities for these goods are given below, where we’ll assume they only have four possible combinations that can be attained.

Country Z
A1
B1
C1
D1
Good X1:
1000
400
200
0
Good X2:
0
150
200
250

Country W
A2
B2
C2
D2
Good X1:
125
100
50
0
Good X2:
0
100
300
500

After speaking with residents within their respective countries, Country Z decides that it’s best to produce on their PPC at pt B1, whereas Country W chooses to produce at pt B2. These two points are points where each country satisfies their domestic demand. We’ll assume that residents of each country will gladly receive more of either good (or both goods), but only if they don’t have to give up any consumption of the other good.

One day, these country decide to consider whether they might be made better off by following the Law of Comparative Advantage. If we assume that trade is made on a 1:1 basis and that these two countries (Z and W) will be trading with one another, then show how each country can utilize the Law of Comparative Advantage and become “better off”.