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1. Table 10.1 shows the production possibilities curves for Augustus and Nero. Prior to specialization and trade, Augustus is producing combination B, and Nero is producing combination D. Table 1 Product Apples Oranges A 8 Augustus's Production Possibilities ?? D 16 12 E 0 10 2 14 16 18 Product Apples Oranges E Nero's Production Possibilities B D 3 A 12 19 16 0 10 14 a) What is the total output of the two countries for both products? b) If each country were to specialize in the product in which it has a comparative advantage, what will be the total output of the two countries for both products? c) What will be the gain from trade? The above table shows the production possibilities curves for Troy and Sparta. Prior to specialization and trade, Troy is producing combination B, and Sparta is producing combination D.
Expert Solution
1. a) Before specialization,
Total quantity of Apple produced by both countries = 6 + 3 = 9 units
Total quantity of Orange produced by both countries = 2 + 3 = 5 units
Total quantity of both the products = 9 + 5 = 14 units.
b) Augusts's opportunity cost of producing 1 unit of apple = 8 / 8 = 1 unit of orange.
Augusts's opportunity cost of producing 1 unit of orange = 8 / 8 = 1 unit of apple.
Nero's opportunity cost of producing 1 unit of apple = 4 / 12 = 0.33 unit of orange.
Nero's opportunity cost of producing 1 unit of orange = 12 / 4 = 3 unit of apple.
So, Augustus has comparative advantage in producing oranges, because the opportunity cost of producing orange in Augustus is less than Nero. And Nero has comparative advantage in producing apples, because the opportunity cost of producing apple in Nero is less than Augustus.
So, Nero will produce only apple and Augustus will produce only oranges.
Total quantity of apple produced = 12 units
Total quantity of oranges produced = 8 units
Total quantity of both the products = 12 + 8 = 20 units.
c) Gain from trade = 20 - 14 = 6 units
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