Answer to Question #47115 in Microeconomics for Yoyo

Question

The table below lists points on a production possibility boundary (PPB) for an economy.
Good X 0 1 2 3 4 5 6 7 8 9 10
Good Y 110 108 104 98 90 80 68 54 38 20 0

(a) Nowsupposethattheeconomyiscurrentlyproducingandconsuming7unitsofxand54unitsofy. What would be the relative price of x (units of y per x) in this economy?
(b) Now assume that the country is opened to trade with the rest of the world where the relative price of x is 6. Illustrate the economy’s consumption possibilities if the production point remains the same as in part (d).
(c) Would you expect the economy to remain at the production point from part (d)? If not, at what point would it produce? Is the economy better able to provide x and y to its members by being opened to trade?

Answer 1

(a) The relative price of x (units of y per x) in this economy would be 54/7 = 7.52 units of y per x.
(b) If the country is opened to trade with the rest of the world where the relative price of x is 6, now it is not efficient to produce good x, because we can import it for lower price. That's why the economy’s consumption possibilities will shift to the right, because the consumption of good x increases.
(c) I would not expect the economy to remain at the production point from part (d), because now the economy is better able to provide x and y to its members by being opened to trade and the economy’s consumption possibilities will shift to the right, because the consumption of good x increases.