The Production Possibilities Curve
Part 1 – Check Your Understanding- The economy of Macrostan can produce only two goods: chips and pretzels.
At any given period of time, the people of Macrostan may choose to produce only chips, only pretzels,
or a combination of the two according to the table below.
*For consistency put chips on the y axis, and pretzels on the x axis.
Can the economy of Macrostan produce 15 bags of chips at the same time that they produce 25 bags of pretzels?
Why or why not?
Identify a specific combination of chips and pretzels that would represent an inefficient use of Macrostan’s resources. Explain.
Assume that Macrostan produces at combination A. Is that combination efficient or inefficient?
Why or why not?
How would a technological change that increases the production of only pretzels affect the production of chips?
Explain.
Calculate the opportunity cost if Macrostan switched from producing combination A to producing B.
Calculate the opportunity cost if Macrostan switched from producing combination B to producing C.
Suppose that Macrostan is producing combination C.
Show what will happen on the graph if there is a decrease in demand for chips.
Comparative Advantage and Trade
Part 1: Output Questions- The diagram below shows the production possibilities curves for two countries:
Luxland and Leanderland. Using equal amounts of resources, Luxland can produce 10 chips or 10 pretzels,
whereas Leanderland can produce 4 chips or 8 pretzels.
Identify which country has the absolute advantage in chips.
Identify which country has the absolute advantage in pretzels.
Calculate the opportunity cost of producing one chip in Luxland.
Calculate the opportunity cost of producing one pretzel in Leanderland.
Identify which country has the comparative advantage in pretzels.
Identify which country has the comparative advantage in chips.
If the two countries specialize and trade, which country will import chips? Explain.
If the terms of trade are 4 chips for 1 pretzel, would trade be advantageous for Luxland? Explain
If the terms of trade are 4 chips for 1 pretzel, would trade be advantageous for Leanderland? Explain.
Assume that Luxland and Leanderland specialize and trade in a way that is advantageous for both of them.
Explain what will happen to the number of pretzels that Leanderland can produce.
The Production Possibilities Curve Part 2: Stretch Your Thinking- Answer the following questions assuming that advancements in technology cause Leanderland to double the amount of chips and pretzels they can produce.
Which country has the comparative advantage in the production of chips? Explain.
Identify a terms of trade that would be advantageous for both countries.
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