Suppose we have the following information about the productivity of two industries in USA and Mexico. The unit labor requirements are given in the following table.
a) Plot production possibilities frontier (PPF) for each country assuming that each country has 120 units of labor. Label axes and intercepts.
b) Provide brief economic interpretation of the slope of PPF in your graphs. Is the principle of increasing costs satisfied on your graph? Justify your answer briefly.
c) Define absolute advantage. Which country has absolute advantage in the production of which good in the example above?
d) Compute opportunity costs for each good in each country. Determine which country has comparative advantage in producing cars and which in engines? Why?
e) What is the most likely pattern of specialization in production and trade between these countries?
f) Consider a situation in which: (i) USA consumes 30 engines and 10 cars; (ii) Mexico consumes 10 cars and 30 engines. Is this consumption pattern attainable if there is no trade between countries? What if countries trade? Briefly justify your answer.