11a. This point is feasible but not efficient in production. Producing 1.8 billion bushels of wheat and 9 billion bushels of corn is less of both wheat and corn than is possible. They could produce more if all the available farmland were cultivated. 11b. At this new production point, farmers would now produce 1 billion more bushels of wheat and 1.7 billion fewer bushels of corn than at their original production point. This reflects an opportunity cost of 1.7 bushels of corn per additional bushel of wheat. But, in fact, this new production point is not feasible because we know that opportunity costs are increasing. Starting from the original production point, the opportunity cost of producing 1 more bushel of wheat must be higher than 1.7 bushels of corn.
11c. This new production point is feasible and efficient in production. Along the production possibility frontier, the economy must forgo 0.666 bushel of wheat per additional bushel of corn. So the increase in corn production from 11.807 billion bushels to 12.044 billion bushels costs the economy (12.044 − 11.807) billion bushels of corn × 0.666 bushel of wheat per bushel of corn = 0.158 bushel of wheat. This is exactly equal to the actual loss in wheat output: the fall from 2.158 billion to 2 billion bushels of wheat. 12a. Gains from trade usually arise from specialization. If the Hatfields are better at raising chickens and the McCoys are better at growing corn, then there will be gains from specialization and trade. 12b . If the McCoys are better at raising chickens and the Hatfields are better at growing corn, then there will be gains from specialization and trade. 13a. Since countries gain from specializing in production of the goods and services in which they have a comparative advantage, the United States must have the comparative advantage in aircraft production, and China must have the comparative advantage in production of trousers, slacks, and jeans. 13b. Since trade has nothing to do with absolute advantage, we cannot determine from these data which country has an absolute advantage in either of these goods. 14a. Peter Pundit is not correct. He confuses absolute and comparative advantage. Even if the EU had an absolute advantage over the United States in every product it produced, the United States would still have a comparative advantage in some products. And the United States should continue to produce those products: trade will make both the EU and the United States better off. 14b. You should expect to see the EU export those goods in which it has the comparative advantage and the United States export those goods in which it has the comparative advantage.
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- Spring '08