Tivoli in panel a and for the Frivoli as the line labeled Original Frivoli PPF

Tivoli in panel a and for the frivoli as the line

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Tivoli in panel (a) and for the Frivoli as the line labeled “Original Frivoli PPF in panel (b). 50 40 30 20 10 0 Quantity of spaghetti (kg) Quantity of meatballs (kg) 20 10 50 40 60 30 (a) Production possibility frontier for the Tivoli 50 40 30 20 10 0 Quantity of spaghetti (kg) Quantity of meatballs (kg) 20 10 50 40 60 30 Original Frivoli PPF New Frivoli PPF (b) Production possibility frontier for the Frivoli The production possibility frontier for the Tivoli was calculated as follows: the Tivoli can produce either 30 kg of spaghetti and no meatballs, or they can produce no spaghetti but 50 kg of meatballs. That is, the opportunity cost of 1 kg of meatballs is 3 / 5 of a kg of spaghetti: in order to produce 1 more kg of meatballs, the Tivoli have to give up 3 / 5 of a kg of spaghetti. This means that the slope of their production possibility frontier is 3 / 5 . A similar argument for the Frivoli shows that their production possibility frontier has a slope of 4 / 3 . b. For the Tivoli, the opportunity cost of 1 kg of meatballs is 3 / 5 of a kg of spaghetti. For the Frivoli, the opportunity cost of 1 kg of meatballs is 4 / 3 kg of spaghetti. That is, the Tivoli have a comparative advantage in meatball production because their opportunity cost is lower. For the Tivoli, the opportunity cost of 1 kg of spaghetti is 5 / 3 kg of meatballs. For the Frivoli, the opportunity cost of 1 kg of spaghetti is 3 / 4 kg of meatballs. That is, the Frivoli have a comparative advantage in spaghetti production because their opportunity cost is lower. c. The Frivoli’s new production possibility frontier is the line labeled “New Frivoli PPF ” in panel (b) of the diagram. Instead of producing 30 kg of meatballs (if they produce no spaghetti), they can now produce 60 kg. d. Now the Frivoli have the absolute advantage in both meatball production and spaghetti production. The Frivoli’s opportunity cost of meatballs has now fallen to 4 / 6 = 2 / 3 ; that is, for each kg of meatballs that the Frivoli now produce, they have to give up producing 2 / 3 of a kg of spaghetti. Since the Frivoli’s opportunity cost of meatballs ( 2 / 3 ) is still higher than the Tivoli’s ( 3 / 5 ), the Tivoli still have the comparative advantage in meatball production. The Frivoli’s opportunity cost of spaghetti is 3 / 2 kg of meatballs and the Tivoli’s is 5 / 3 kg of meatballs, so the Frivoli have the comparative advantage in spaghetti production. 4. According to the Canadian International Merchandise Trade Database from Statistics Canada, in December 2016, Canada sold aircraft and spacecraft worth $113.94 million to China and bought aircraft and spacecraft worth only $40.5 million from China. During the same month, however, Canada bought $1,568.2 million worth of apparel and clothing accessories from China but sold only $643,705 worth of apparel and clothing accessories to China. Using what you have learned about how trade is determined by comparative advantage, answer the following questions.
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  • Fall '19
  • Economics, Production-possibility frontier

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