Plot the PPC of a nation given by the following data. $$ \begin{array}{lrr} \text { Combination } & \text { Health Care } & \text { All Other Goods } \\ \hline \text { A } & 0 & 100 \\ \text { B } & 25 & 90 \\ \text { C } & 50 & 70 \\ \text { D } & 75 & 40 \\ \text { E } & 100 & 0 \\ \hline \end{array} $$ a. Calculate the marginal opportunity cost of each combination. b. What is the opportunity cost of combination C? c. Suppose a second nation has the following data. Plot the PPC, and then determine which nation has the comparative advantage in which activity. Show whether the two nations can gain from $$ \begin{array}{lcc} \text { Combination } & \text { Health Care } & \text { All Other Goods } \\ \hline \text { A } & 0 & 50 \\ \text { B } & 20 & 40 \\ \text { C } & 40 & 25 \\ \text { D } & 60 & 5 \\ \text { E } & 65 & 0 \end{array} $$

Short Answer

Expert verified
Can the two nations gain from each other? Explain your answer briefly. Answer: Nation 1 has a comparative advantage in producing Health Care, while Nation 2 has a comparative advantage in producing All Other Goods. Both nations can benefit from trading with each other, as they can specialize in their respective advantages and maximize their production and consumption possibilities, ultimately leading to gains for both nations.

Step by step solution

01

Plotting the PPC for the first nation

First, create a graph with Health Care on the horizontal axis and All Other Goods on the vertical axis. Then plot the data points for each combination (A to E) on the graph. Once plotted, connect the points with a smooth curve to form the PPC for the first nation.
02

Calculate the Marginal Opportunity Cost (MOC)

To calculate the MOC, you need to find the slope between two consecutive points. The MOC between A and B is the change in All Other Goods divided by the change in Health Care, which is \(\frac{90-100}{25-0} = \frac{-10}{25} = -0.4\). Similarly, calculate the MOC for the remaining combinations: MOC between B and C: \(\frac{70-90}{50-25} = -\frac{20}{25} = -0.8\) MOC between C and D: \(\frac{40-70}{75-50} = -\frac{30}{25} = -1.2\) MOC between D and E: \(\frac{0-40}{100-75} = -\frac{40}{25} = -1.6\)
03

Find the Opportunity Cost of Combination C

The opportunity cost of combination C is the foregone production of All Other Goods as more Health Care is produced. Since combination C is between combinations B and D, we find the opportunity cost by calculating the average MOC between B and D: \(-0.5*(-0.8 + -1.2) = -0.5*(-2) = 1\) unit of Health Care costs 1 unit of All Other Goods.
04

Plot the PPC for nation 2

Repeat Step 1 for the second nation using their data points and create their PPC.
05

Determine Comparative Advantage

To determine the comparative advantage, calculate the opportunity cost of producing Health Care in both countries using the MOC calculated above. Consider the MOC for combination B in each nation. Nation 1: (B) MOC = -0.4 -> Opportunity cost for Health Care = 0.4 All Other Goods Nation 2: (B) MOC = \(\frac{40-50}{20-0} = -0.5\) -> Opportunity cost for Health Care = 0.5 All Other Goods Since nation 1 has a lower opportunity cost for producing Health Care (0.4 vs. 0.5), it has a comparative advantage in Health Care. Meanwhile, nation 2 has a comparative advantage in producing All Other Goods, because it has a lower opportunity cost for producing Health Care (0.5 vs. 0.4). We can compare each combination and create a table showing the comparative advantages.
06

Determine Gains from Each Other

As nation 1 has a comparative advantage in Health Care production and nation 2 has a comparative advantage in producing All Other Goods, they can both benefit by specializing in their respective advantages and engaging in trade. This allows each nation to maximize its production and consumption possibilities, ultimately leading to gains for both nations.

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