Exercise Sheet for Students

ECO440 International Economics
Dr. Tohamy

Extra Credit Problem
This assignment is worth 10 Points.

Worksheets below
Nonlinear Production Possibilities Curve
Shifting the Production Possibilities Curve
Linear Production Possibilities Curve and Opportunity Costs
Two Linear Production Possibilities Curves and Gains from Specialization and Trade
Graphical Representation of Gains from Specialization and Trade
Sharing the Gains from Specialization and Trade
A Graphic View of Sharing the Gains from Specialization and Trade
Gains from Exchange with Nonlinear Production Possibilities Curves (Variable Opportunity Costs)
Graphic View of Gains from Exchange
Consumption Possibilities at Points on the Production Possibilities Curve

This assignment accompanies the excel worksheet Comparative Advantage.xls. Be sure to follow the steps in the assignment and to make sure you open a specific worksheet before you answer the questions on it.

Sheet Title: A Nonlinear PPC. This sheet presents a concave production possibilities curve (PPC). Maximum X and Y are equal to 50 and 100 units respectively.

 1 Define the opportunity cost of X.

 2 Click on the "View Table" button. Why are the numbers under the column ChY/ChX different from the numbers under the column titled Opp Cost?

 3 What is the opportunity cost of Y (in terms of X) for the following points on the PPC? The opportunity cost will be measured in discrete units (e. g., as Y changes from 19 to 36, from 36 to 51, and so forth.

 X 5 10 15 20 25 30 35 40 45 Y 99 96 91 84 75 64 51 36 19 Opp Cost of Y

 4 Choose a different value for Maximum X.  New maximum X =______. How does the PPC change? How does the opportunity cost of X for a given value of X change? Why?
 5 Choose a different value for Maximum Y. (Keep the new maximum X from Question 4.) New maximum Y =______. How does the PPC change (compared to your answer in Question 4)? How does the opportunity cost of X for a given value of X change? Why?

Sheet Title: 2 PPCs. This sheet shows how a change in the economy's technology or resource endowment causes the PPC to shift. Keep the same values for Max X and Max Y that you used in questions 4 and 5 and choose two new values.

New Max X = ____________ and new Max Y = ____________.

 6 What is the opportunity cost of Y (measured along PPC_1 and PPC_2) for the X points given below? (Fill in the blanks.)       How are the numbers in the two rows above different? Why?

Opportunity Cost of X  along:
 X 10 20 30 40 50 60 70 80 90 PPC_1 PPC_2

Sheet Title: Linear PPC.  This sheet presents a linear production possibility curve for a country with maximum X and maximum Y equal to 60 and 150 units respectively.

 7 Choose a different value for Maximum X.  Maximum X =______. How does the PPC change? How does the opportunity cost of X change? Why?         How does the opportunity cost of Y change? Why?

 8 Choose a different value for Maximum Y. (Keep the new maximum X from Question 7). Maximum Y =______.How does the PPC change (compared to your answer in Question 7)? How does the opportunity cost of X change? Why? How does the opportunity cost of Y change? Why?

Sheet Title: Gains -Linear.  This sheet shows how two countries with different production possibilities can trade with each other and can gain from trade. It calculates the percentage increase in Y production that results from trade, given a fixed value of X. A’s X and B’s X production level are both equal to 25 units respectively. B's maximum X = 60 and B's maximum Y = 200.

 9 Choose different values for A's X.  A's X now equals __________.     What happens to the percentage gain in Y if A’s X increases? Why?         What happens to the percentage gain in Y if A’s X decreases? Why?

 10 Choose different values for B's X. B's X is now __________. What happens to the percentage gain in Y if B’s X increases? Why?         What happens to the percentage gain in Y if B’s X decreases? Why?           What happens to the percentage gain in Y if A’s X=50 and B’s X=0? Why?

Use the scroll bars to change the values of A’s X and B’s X to 25 and 25 respectively. Click here if you wish to  Return to top of Exercise Sheet.

Sheet Title: Graph-Linear.  This sheet shows the production possibilities curves for county A, country B and the combined production possibilities curve.

 11 Why is the combined PPC kinked (i.e. why does its slope change)?

Sheet Title: Sharing Gains.  This sheet shows in tabular form that gains from trade will be shared according to the relative price of the two goods.

 12 Why will trade occur only if the price of X relative to the price of Y is between 2.5 (A’s opportunity cost of X) and 3.33 (B’s opportunity cost of X).

 13 What happens if the price of X is equal to 10? Is trade beneficial for country A? country B? Why or why not?

Sheet Title: Production and Consumption.  This sheet shows graphically how the increased output is shared between the two countries.

 14 Why does the Ya_cons line start at the same point as the Ya_prod on the X-axis?
 15 Why does the Yb_cons line start at the same point as the Yb_prod on the Y-axis?
 16 What happens to the graph when you change the price of X to 10? Why?

Sheet Title: Nonlinear PPCs.  This sheet shows the increase in total Y production (holding X constant) as a result of trade between the two countries. A’s maximum X, maximum Y, and X production are equal to 30, 90, and 30 respectively. B’s maximum X, maximum Y, and X production are equal to 100, 400, and 70 respectively.

 17 What happens to the opportunity cost at the level of efficient resource assignment? Why?

 18 Change B’s production of X to 100. What happens to the opportunity cost at the level of efficient resource assignment? Why?

Sheet Title: Gains from Trade.  This sheet shows in a tabular form the increase in total Y production (holding X constant) as a result of trade between the two countries.

 19 Change B’s initial production of X to 100 units. What happens to the percentage increase in Y? Why?

Sheet Title: Nonlinear PPCs and CPCs.  This sheet shows the production and consumption possibilities curves for countries A and B. It provides a graphic representation of the gains from trade.

 20 What is the slope of the blue lines? Why are they tangent to the PPCs?