# Practice Questions 2 Answers Fall 2003 Econ 101

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Fall 2003

Econ 101
1. A country's consumption possibilities frontier can be outside its production possibilities frontier if

b. there is an increase in the level of technology.

c. the country engages in trade.

d. All of the above.

e. Both a and b are correct.

Answer: c, the country engages in trade. In a and b PPF will shift outward but still a point outside PPF will be unattainable.

2. Country A and country B produce wine (w) and cloth (c). The production possibility frontier for A and B can be represented by the following equations:

A: 2w + 3c = 12

B: w + c = 5

a) Using two separate graphs, draw the PPF for both countries by plotting wine (w) on x-axis and cloth (c) on y-axis.

b) Consider the following combonations:

(i) 3 units of wine and 2 units of cloth,

(ii) 1 units of wine and 4 unit of cloth,

(iii) 2 units of wine and 2 unit of cloth.

Fill in the following grid for each of the above combinations.

 Combi-nations Country A Country B Attainable Unattainable Efficient Inefficient Attainable Unattainable Efficient Inefficient (i) Yes No Yes No Yes No Yes No (ii) No Yes - - Yes No Yes No (iii) Yes No No Yes Yes No No Yes

c) What is the opportunity cost of wine in country A? What is the opportunity cost of wine in country B?

Answer: 2/3units of cloth in country A and 1unit of cloth in country B.

d) Who has the comparative advantage in cloth? Who has the comparative advantage in cloth wine?

Answer: Country B has comparative advantage in cloth while country A has the comparative advantage in wine.

e) Can there be gains from trade?

f) If both countries specialize in the production of the item they are good at, what is the maximum amount of wine and cloth that can be produced?