2. 00) Graph below the production possibility frontier for X and Y. Assuming the

Question

2. 00) Graph below the production possibility frontier for X and Y. Assuming the country is in autarky and produces much more X than Y, select a point as the country's current efficient production labeling these Xa and YA Show how this relates to Px and Py. Assume that the country's current price ratio Px/Py Px"/Py where Pr the world price of X (Py for Y) Show what occurs in the long run when the country opens to free trade including production (Xp, Yp). Pick a consumption point (Xc. Yc) and show amounts exported and imported

Explanation / Answer

The production possibilities frontier (PPF) is curve that exhibits all the possible combinations of two products that a country can manufacture with its given resources and given state of technology. The slope of a PPF is the opportunity cost of producing one product in relation with the other
Here the PPF is a green concave shaped curve drawn for X and Y. Initially Home produces at A. This point lies at the PPF. The slope of the PPF is the price ratio in home country. Given that the country’s current price ratio is greater than the world price of X, it will indulge in trade and import X and will export Y. It will reduce its production of X and increase the production of Y.

See that the consumption possibilities are increased at C wher both X and Y are increased in consumption.

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