First Formal Assignment

1. Trade and specialization (Chapter 3)
a) Country A

Resources devoted to clothing
Output of clothing
Resources devoted to food
Output of food
100%
28
0%
0
80%
25
20%
4
60%
17
40%
11
40%
12
60%
15
20%
7
80%
18
0%
0
100%
21

i. Production Possibility Frontier of Country A

ii. When the production of food is increasing, the opportunity of food in terms of clothing is negative; this is because the opportunity cost of clothing is larger than the opportunity of cost of food. Therefore, the more resources they spend on food rather than clothing they are loosing more production of clothing. This is the reason why the PPF has a negative slope. The PPF gets more inelastic as it goes down the graph; this implies that the more food they produce the more clothing they are giving up, since the opportunity cost for clothing is way larger than the food. The In order to calculate the opportunity cost, divide the change in clothing by the change in food.

Opportunity Cost= Change in Clothing / Change in Food

1) 100% to 80% = 28 – 25/ 0 – 4
= 3/-4 => -0.75

2) 80% to 60% = 25 – 17/4 – 11
= 8/-7 => -1.14

3) 60% to 40% = 17 – 12/11 – 15
= 5/-4 => -1.25

4) 40% to 20% = 12 – 7/15 – 18
= 5/-3 => -1.67

5) 20% to 0%= 7 – 0/18 – 21
= 7/-3 => -2.33

iii. If the country is becoming better at the production of food, the production of the food will increase. Which means that the production possibility frontier will increase as well, in this case the line will shift outwards. Although the production of food increases this does not mean that the production of clothing increases as well. In this case, the food part of the graph increases or shifts outward meanwhile the clothing part of the graph remains the same.

Increase in the production of Food:

iv. If Country A gets better at producing both food and clothing the production possibility frontier will shift outwards, the whole curve will shift. In the question above, only the food