Suppose an economy produces two goods with a concave-to-the-origin Production Possibilities Boundary (PPB) described by the following data (where the slope refers to the change in y for a change in x).
Production A B C D E
x(milliions) 75 70 50 20 0
y(millions) 0 20 50 70 75
slope -2 -1 -0.5
(a) Using the data, sketch the PPB with x and y on their respective axes, and identifying points A-E.
(b) In autarky, if this economy chooses to produce at point C, what is the opportunity cost of x?
(c) Suppose this economy opens to trade with the rest of the world at a price ratio such that each unit of x costs 2 units of y. Explain why domestic producers would begin to produce more x and less y.
(d) After the country has fully adjusted to its trade opportunities what will it produce? Show that it is now able to consume more of both goods than it could in autarky.