Question

Suppose that Happy Land produces only two goods-food and suntan oil. Its production possibilities are: Food (pounds per month) Suntan oil (gallons per month) 0 300 200 100 0 50 100 150 Active Land also produces only food and suntan oil, and its production possibilities are: Food (pounds per month) 150 100 Suntan oil (gallons per month) 0 100 200 300 50 0 Draw the two PPFS What are the opportunity costs of food and suntan oil in Happy Land? a. b. Why are the opportunity costs the same at each output level? What are the opportunity costs of food and suntan oil in Active Land? c. d. If each nation specialized where they have a comparative advantage, and then traded, find the acceptable ranges for trade. 1 pound of food would have to trade between which values of suntan oil? 1 pound of suntan oil would have to trade between which values of food? e. If each nation produces where they have a comparative advantage, and the terms of trade are 50 pounds of food for 75 gallons of suntan oil, how much will each nation profit by, compared to Active Land producing both good themselves?

Answer 1

The PPF illustrates trade-offs and opportunity costs of producing goods. Opportunity costs in Happy Land for food and suntan oil can be calculated using the given production possibilities. Each country should specialize according to their comparative advantage and then trade to gain maximum benefit.

Step-by-step explanation:

The production possibility frontier (PPF) demonstrates the trade-offs a country faces in the production of two goods. The slope of the PPF gives us the opportunity cost of producing one more unit of a good.

This concept is central to understanding comparative advantage, where countries determine the least costly goods for them to produce relative to other countries, aiding in the decision of whether to produce it domestically or engage in trade.

In the case of Happy Land and Active Land, the opportunity costs in Happy Land for food in terms of suntan oil can be calculated as follows: Moving from 300 gallons of suntan oil to 200 gallons (a reduction of 100 gallons) allows for the production of 200 pounds of food.

Therefore, the opportunity cost of 200 pounds of food is 100 gallons of suntan oil. The opportunity cost for 1 pound of food is 0.5 gallons of suntan oil (100 gallons/200 pounds).

Similarly, the opportunity cost for suntan oil is found by considering the inverse relationship. If Happy Land reduces food production from 200 to 0 pounds, suntan oil production increases from 200 to 300 gallons, which is an increase of 100 gallons for 200 pounds of food not produced. So the opportunity cost of 1 gallon of suntan oil is 2 pounds of food (200 pounds/100 gallons).

For Active Land, since the PPF is not linear like Happy Land's, we cannot calculate the opportunity costs simply by looking at the endpoints.

However, if we take two points on the active curve (such as going from 0 to 100 gallons of suntan oil), the opportunity cost in terms of lost food production can be calculated. Each country should specialize in the good for which it has the lower opportunity cost to produce, and then they can engage in trade that benefits both parties.