Question

If the fictitious country of Spudlandia puts all of its production resources into potatoes, it can produce 80 units of potatoes. If it puts all of its production resources into apples, it can produce 20 units of apples. If the fictitious country of Fruitopia puts all of its production resources into potatoes, it can produce 40 units of potatoes. If it puts all of its production resources into apples, it can produce 120 units of apples. Assume that both countries have constant cost functions for both products.

a. Given the information above, Spudlandia has comparative advantage in (Click to select) potatoes apples both apples and potatoes neither apples nor potatoes .

Now suppose that the two countries open up to trade with each other and the terms of trade are set at 1.25 units of apples per unit of potatoes. Show the production possibilities curve and trade possibilities line for Spudlandia.

Instructions: Use the tools provided 'PPC' and 'TPL' to draw the production possibilities curve (PPC) and the trade possibilities line (TPL) for Spudlandia. Plot only the endpoints of each line.

Answer 1

Spudlandia has a comparative advantage in producing potatoes while Fruitopia has a comparative advantage in apples. The production possibilities curve (PPC) for Spudlandia is a straight line between production of all apples or all potatoes, while the trade possibilities line (TPL) shows the different combinations of goods Spudlandia can consume when trading with Fruitopia.

Step-by-step explanation:

Comparative advantage is a key concept in international trade and economics. It refers to the ability of a country to produce a particular good or service at a lower opportunity cost compared to other countries. In the scenario provided, Spudlandia has a comparative advantage in producing potatoes, as it can produce more potatoes compared to Fruitopia given the same resources.

Conversely, Fruitopia has a comparative advantage in producing apples. When drawing the production possibilities curve (PPC) for Spudlandia, it would be a straight line with endpoints at (0, 20) for apples and (80, 0) for potatoes on a graph with apples on the x-axis and potatoes on the y-axis.

The trade possibilities line (TPL) represents the new combinations of apples and potatoes Spudlandia can consume if it trades with Fruitopia at the given terms of trade of 1.25 units of apples for each unit of potatoes. The endpoints of the TPL would be determined by the number of apples that can be obtained by trading away all the potatoes and vice versa. Without specific points provided, the general approach would involve calculating how many apples Spudlandia could acquire by trading all its 80 units of potatoes, and how many potatoes it could acquire by trading all its 20 units of apples, at the 1.25-to-1 trade ratio.