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Consider a two-country, two-good world where the countries face increasing opportunity costs. With the aid of ONE well-labeled diagram, show that even if both countries have the same production possibility frontier, they can still gain from trade if their consumption preferences differ (i.e., they have different sets of indifference curves). When answering the question, keep the following in mind:

a) In your written explanation, describe how both countries can gain from trade and their respective patterns of trade.
b) Assume Home's consumption preference is skewed towards good X, while Foreign's set of indifference curves is skewed towards good Y.
c) In your diagram:
1. Show the indifference curves for both countries before and after free trade.
2. Identify the autarky equilibrium and free-trade equilibrium for both countries (i.e., the production and consumption bundles).
3. Label good X on the horizontal axis.
4. Consider drawing a large diagram for clarity.



Answer :

Answer:

The Production Possibilities Curve (PPC) is a model used to show the tradeoffs associated with allocating resources between the production of two goods. The PPC can be used to illustrate the concepts of scarcity, opportunity cost, efficiency, inefficiency, economic growth, and contractions.

For example, suppose Carmen splits her time as a carpenter between making tables and building bookshelves. The PPC would show the maximum amount of either tables or bookshelves she could build given her current resources. The shape of the PPC would indicate whether she had increasing or constant opportunity costs.

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