Question

Below is the production possibilities frontier for the United States. It shows that the United States is able to produce either 100 barrels of oil or 25 bushels of corn using all of its available resources. Also suppose that the United States decides to produce at point A : 60 barrels of oil and 10 bushels of corn. If the United States engages in international trade and trades 20 barrels of oil for 20 bushels of corn with another country, it will be able to consume outside of its production possibilities frontier. How many bushels of corn will it have at the end of the exchange

Answer 1

30 bushels of corn

Step-by-step explanation:

opportunity cost of producing 1 barrel of oil = 25/100 = 0.25 bushels of corn

opportunity cost of producing 1 bushel of corn = 100/25 = 4 barrels of oil

current production:

60 barrels of oil

10 bushels of corn

if it trades 20 barrels of oil in exchange for 20 bushels of corn, it will be gaining 20 - (20 x 0.25) = 15 bushels of corn

after the exchange, the US will have 30 bushels of corn and 40 barrels of oil

this level is outside the PPF curve because if the US produced 40 barrels of oil, its maximum production of corn would have been 15 bushels (remember the 15 bushels of corn gained).