Problem Set 1

Problem Set 1 - 3 2. Suppose there are two countriesCountry...

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1 Production Possibility Curve, Trade and Comparative Advantage This problem set is due on Wednesday, Sep. 9. Please turn it in before we start the class. Late submissions will not be accepted. 1. A clothing accessory company produces scarves and earrings. Below are the production possibility combinations it can produce with the resources that it has. Scarves Earrings 10 0 9 50 8 90 7 120 6 145 5 165 4 185 3 200 2 215 1 225 0 230 a. Plot the production possibility curve. b. What is the opportunity cost of increasing scarf production from 2 to 3 scarves?
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2 c. Suppose the cost of making scarves doubles. Redraw the production possibility curve to reflect this change. d. Technological advances increase production of both earrings and scarves by 10% without increasing costs. Demonstrate the effect of this innovation on the production possibility curve.
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Unformatted text preview: 3 2. Suppose there are two countriesCountry A and Country B. Assume both of these countries have linear production possibility curves. Country A can produce 4,000 cell phones or 10,000 garments a day, or any combination thereof. Country B can produce 6,000 cell phones or 6,000 garments a day, or any combination thereof. a. Draw each countrys production possibilities curve. b. Which country has a comparative advantage in producing cell phones? Garments? Explain your answer. 4 c. Demonstrate how 4,000 cell phones and 3,000 garments per day was not a possible combination for Country B before trade but is possible with trade. d. Draw a production possibility curve that shows the combination of goods these two countries can produce together. What accounts for the slope of each of the two segments of this curve?...
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Problem Set 1 - 3 2. Suppose there are two countriesCountry...

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