EXERCISE 2: production possibilities frontier (ppf)
J. Wahl – Micro Principles
Suppose Argentina and Germany are isolationist countries. Each country has the capacity to
produce steak, ale, or some linear combination of the two. The countries have the same
population, as well as the same amounts of capital, raw materials, and other relevant inputs. In a
typical work day, the maximum (in millions) that each country could produce of each good is as
follows:
Argentina Germany
steak (no ale produced) 16 4
ale (no steak produced) 5 10
1. Please draw the ppf for each country (putting "steak" on the horizontal axis).
2. If each country consumed steak and ale in equal amounts, how much steak and ale would
be produced and consumed by each country? In total?
Now suppose Argentina and Germany are trying to decide whether to open up trade with each
other.
3. Draw the ppf for the two countries together if they were to decide to trade -- that is, they
could separate production from consumption decisions.
4. Show, for each point on your ppf, what Germany is producing and what Argentina is
producing.
5. What would the supply curve for steak look like if Germany and Argentina decide to
open up trade?
6. How would you, as a group of expert trade economists, advise the two governments as to
whether they should open their borders? Use your answer to #2 to buttress your advice.
Now suppose that the production possibilities for the two countries are as follows:
Argentina Germany
steak (no ale produced) 16 4
ale (no steak produced) 12 10
7. Would your answer to #6 change? If so, why? If not, why not?
8. Go back to the original output matrix. Now suppose that Germany has three times as
much labor, capital, and other inputs as Argentina. How does this change things?
