Question

The following graph shows the production possibilities frontier for the imaginary country of Contente under conditions of increasing costs. In the absence of trade, the relative cost of rice in Contente in terms of phones (or the marginal rate of transformation (MRT) of rice into phones) is shown by the slope of line , tangent to the production possibilities frontier at point A. 400 360 Consumption After Trade 320 280 240 200 160 120 80 40 0 46 8 0 12 14 16 18 20 PHONES

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Answer 1

MCQ 1) option A is correct

When PPF is tangent to relative cost line, then economy is at equilibrium in autarky

So at eqm in absence of trade, MRPT = P_phone/P_rice

Thus it produces & consumes 6 phones &312 rice units.

At point A, slope of line t1, is( 360-200)/20 = 8

Thus forego 8 bushels of rice to produce 1 phone

after trade, slope of line t2= (240-80)/(20-12) = 20

Thus now forego 20 bushels of rice to produce 1 phone,

thus relative cost of phone in terms of rice has increased.

After trade, it produces 12 phones , but consumes only 6 phones, thus gains advantage of 6 phones, which is gain from Specialization.

Thus it exports 6 phones for 20 bushels of rice each , thus gets 120 bushels of rice ,

So Consumption after trade for rice is 240+120 = 360 .

so Consumption gain of rice is 360-312 = 48 bushels of rice.

new Consumption point is at phone = 6, & rice = 360

Shown by light blue circle.

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