Economics Assignment: Production Possibility and Comparative Advantage

The assignment explores key economic concepts, including production possibility frontiers, opportunity costs, and comparative advantage. It analyzes a scenario involving the production of goods X and Y, determining the optimal production points and the relative prices of goods. The solution dem...Read More

Running head: ECONOMICS ASSIGNMENT
Economics Assignment
Name of the Student
Name of the University
Course ID

1ECONOMICS ASSIGNMENT
Table of Contents
Answer c..........................................................................................................................................2
Answer d..........................................................................................................................................2
Answer e..........................................................................................................................................3
Answer f...........................................................................................................................................4
References list..................................................................................................................................5

2ECONOMICS ASSIGNMENT
Answer c
Point A indicates the production the production point consisting 5 units of X and 50 units of Y.
Opportunity cost of X at the production point is
Opportunity cost of X =50
5
¿ 10 units of Y
Answer d

3ECONOMICS ASSIGNMENT
Point B reflects the production the production point consisting 8 units of X and 36 units of Y.
Opportunity cost of X at the production point is
Opportunity cost of X = 36
8
¿ 4.5 units of Y
Relative price of X is same as the opportunity cost. Therefore, relative price of X is 4.5.
Answer e
Before trade, consumption possibility of an economy is same as its production possibility.
Point B on the PPB thus shows both the consumption and production possibility of the economy
(Leamer and Stern 2017).
The relative price of X in the international market is 10. The relative price of X in the
domestic economy is 4.5. Price or cost of X in the domestic market is lower relative to that in the
world market. The country thus enjoys comparative advantage in producing X.
Answer f
After opening to trade, nation should specialize in the good where it devices a
comparative advantage. The concerned economy has a comparative advantage in X. The country
thus should specialize in good X. If should then produce only X and import Y from the nation
having a lower opportunity cost. Using all the resources, the economy can produce 10 units of X.
The optimal production point thus is to produce 10 unit of X and 0 units of Y. The country thus
is expected to operate at the optimal production point after trade (Feenstra 2015).

4ECONOMICS ASSIGNMENT
Following comparative advantage in production of X, the country is better able to provide
X. Whether the country is better able to provide Y, then depends on opportunity cost of Y. The
opportunity cost of Y when the country is producing 8 units of X and 36 units of X 8/36 = 0.22.
The price of Y relative to X in the international market is 1/10 = 0.1. As the relative price of Y in
the international market is lower than opportunity cost of Y, the country does not have a
comparative advantage in Y. Therefore, the county though is better able to produce X but not Y.

5ECONOMICS ASSIGNMENT
References list
Feenstra, R.C., 2015. Advanced international trade: theory and evidence. Princeton university
press.
Leamer, E.E. and Stern, R.M., 2017. Quantitative international economics. Routledge.