Written Homework #1
1. 1. Paula can produce any of the following combinations of goods X and Y: (a) 200X and 0Y, (b) 100X and 50Y, and (c) 0X and 100Y. Michael can produce any of
the following combinations of goods X and Y: (a) 100X and 0Y, (b) 50X and 80Y, and (c) 0X and 160Y. Who has a comparative advantage is in the production of
good X? of good Y? Explain your answer.
2. 2. Using the data in Problem 1, prove (that is, show that their PPFs shift out after specialization and exchange) that both Paula and Michael
can be made better off through specialization and trade.
3. Using the data in the table, answer the following questions: (a) For which good does China have a comparative advantage? (b) For which good
does India have a comparative advantage? (c) What might be a set of favorable terms of trade for the two countries? (d) Prove that both
countries would be better off in the specialization-trade case than in the no specialization-no trade case.
Points on
Production
Possibilities Frontier
CHINA
INDIA
Good X
Good Y
Good X
Good Y
A
150
0
90
0
B
100
25
60
60
C
50
50
30
120
D
0
75
0
180