Question

Figure 22-3 Petroleum O O O O OOOOoooooo In Figure 22-3, the solid lines represent the respective production possibilities curves for the United States and Mexico. Which graphs show the correct consumption possibilities curves dashed lines) after an agreement is reached to trade I unit of wheat for 1 unit of petroleum? (1) and (2) b. (3) and (4) c. (?) and (3) d. (1) and (4) o

Answer 1

We are given the production possibility curves and the consumption curves.

For USA, from graphs (1) and (3), it is seen that it can produce either 40 petroleum or 60 wheat. So the opportunity cost to produce one petroleum is 60/40=3/2=1.5 wheat and the opportunity cost to produce one wheat is 40/60=0.66 petroleum.

For Mexico from graphs (2) and (4), it is seen that it can produce either 30 petroleum or 20 wheat. So the opportunity cost to produce one petroleum is 20/30=0.66 wheat and the opportunity cost to produce one wheat is 30/20=1.5 petroleum.

Hence USA has comparative advantage is production of wheat and Mexico has it in petroleum.

So when USA trades wheat for petroleum, it would be able to consume more of petroleum and hence the graph (1) would be the answer.

Also Mexico would trade petroleum for wheat and hence would be able to produce more wheat. So graph (2) would be correct.

Answer would be option A) 1 and 2