With trade, the production possibilities for two nations lie a. outside their consumption possibilities. b. inside their consumption possibilities. c. at a point equal to the world production possibilities curve. d. none of the above.

Short Answer

Expert verified
With trade, the production possibilities for two nations lie inside their consumption possibilities. Hence, the correct answer is option B.

Step by step solution

01

Option A: Outside their consumption possibilities

If nations are trading, they are specializing in producing goods in which they have a comparative advantage. This specialization and trade allow countries to consume more goods and services than they would be able to without trade. However, production possibilities still represent the maximum that a country can produce given its resources and technology. Therefore, with trade, production possibilities cannot lie outside their consumption possibilities. So, option A is incorrect.
02

Option B: Inside their consumption possibilities

When countries trade and specialize in their comparative advantage, they can consume more goods than if they were to produce everything on their own. This means that their consumption is higher than what their production capabilities would allow if they did not trade. Therefore, their production possibilities will lie inside their consumption possibilities. This means that option B is the correct answer.
03

Option C: At a point equal to the world production possibilities curve

The world production possibilities curve represents the maximum output that can be achieved by all countries combined given their resources and technology. If two nations are trading, their individual production possibilities will not necessarily lie at a point equal to the world production possibilities curve. It could be higher or lower depending on their comparative advantage and the amount they produce and trade. So, option C is incorrect.
04

Option D: None of the above

Since option B correctly describes the relationship between production possibilities and consumption possibilities for two nations when they engage in trade, option D (none of the above) is incorrect. #Conclusion# The correct answer is option B: With trade, the production possibilities for two nations lie inside their consumption possibilities.

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