Consider a simple two-good economy, the production possibility frontier for the
ID: 1121845 • Letter: C
Question
Consider a simple two-good economy, the production possibility frontier for the economy, and the set of indifference curves representing individuals’ preferences for these goods. Quantities of good x produced and consumed are plotted on the horizontal axis. Quantities of good y produced and consumed are plotted on the vertical axis. This economy is initially closed to trade. Refer to Figure 1. Without international trade, this economy produces and consumes ______________ units of good x and ___________________ units of good y. (NOTE: Write your answers in number format, with 2 decimal places of precision level; do not write your answers as fractions. Add a leading zero and trailing zeros when needed. Use a period for the decimal separator and a comma to separate groups of thousands.) Figure 1:
13 World prices E Pre-trade pricesExplanation / Answer
Without international trade , this economy produces and consumes 4 units of good X and 11 units of good Y because at point A (PPF i.e production possibility frontier is tangent to the budget line) and also to the indifference curve U1 which maximises the consumer utility. So , 4 units of X and 11 units of Y , the economy produces and consumes without international trade.